The Implications of Labor Market Heterogeneity on Unemployment Insurance Design

RePEc Short ID: pbi318
ORCID iD: 0000-0001-7323-1932

Birinci, Serdar; See, Kurt

doi:10.20955/wp.2024.026

Working Paper Revision

The Implications of Labor Market Heterogeneity on Unemployment Insurance Design

Abstract: We digitize state-level, time-varying unemployment insurance (UI) laws on initial eligibility, payment amounts, and payment durations, and combine them with microdata on labor market outcomes to estimate UI eligibility, take-up, and replacement rates at the individual level. We document how income and wealth levels affect unemployment risk, eligibility, take-up, and replacement rates both upon job loss and over the course of unemployment spells. We evaluate whether these empirical findings are important for shaping UI policy design using a general-equilibrium, incomplete-markets model with a frictional labor market that matches our empirical findings. We show that a nested, widely used standard model fails to capture these patterns and yields a substantially less generous optimal UI policy compared to the baseline model. We also demonstrate that our empirical results are relevant for microeconometric studies estimating the effects of UI policy changes on labor market outcomes.

JEL Classification: E24; H31; J64; J65;

https://doi.org/10.20955/wp.2024.026