On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Richmond
Working Paper
Unemployment insurance with a hidden labor market
Fernando Álvarez-Parra
Juan M. Sanchez
Abstract

This paper considers the problem of optimal unemployment insurance (UI) in a repeated moral hazard framework. Unlike existing literature, unemployed individuals can secretly participate in a hidden labor market. This extension modifies the standard problem in three dimensions. First, it imposes an endogenous lower bound for the lifetime utility that a contract can deliver. Second, it breaks the identity between unemployment payments and consumption. And third, it hardens the encouragement of search effort. The optimal unemployment insurance system in an economy with a hidden labor market is simple, with an initial phase in which payments are relatively flat during unemployment and with no payments for long-term unemployed individuals. This scheme differs substantially from the one prescribed without a hidden labor market and resembles unemployment protection programs in many countries.


Download Full text
Download Full text
Cite this item
Fernando Álvarez-Parra & Juan M. Sanchez, Unemployment insurance with a hidden labor market, Federal Reserve Bank of Richmond, Working Paper 09-09, 2009.
More from this series
JEL Classification:
Subject headings:
For corrections, contact Christian Pascasio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal