Working Paper Revision

The Implications of Labor Market Heterogeneity on Unemployment Insurance Design

Abstract: We estimate UI eligibility, take-up, and replacement rates at the individual level and document how these rates vary with earnings and wealth prior to job loss, as well as over the duration of unemployment. To evaluate whether our empirical findings are important for shaping UI policy design, we analyze a widely used framework that combines an incomplete markets model with a frictional labor market. We show that when the model is extended to match our findings, the optimal policy becomes substantially more generous relative to the nested model that does not. In addition, the welfare gains from the optimal policy are an order of magnitude larger. We also demonstrate that our empirical results are relevant for microeconometric studies estimating the effects of UI changes on labor market outcomes.

JEL Classification: E24; H31; J64; J65;

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

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2025-11-03

Number: 2024-026

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