Essays on Unemployment Insurance Design
Abstract: Essay 1: This paper adds to the literature on the effects of unemployment insurance (UI) on post-unemployment outcomes. A vast literature has established a relationship between the generosity of UI and unemployment duration. However, little is known about the impact of UI benefits on subsequent labor market outcomes. UI reduces search efforts but provides workers with more time to find a suitable job. To estimate the causal impact of benefit levels on several measures of job quality, I use a kink in the relationship between previous wages and benefits that is induced by the cap on UI benefits in Sweden. Like those of previous research, my findings indicate that higher UI benefits prolong unemployment duration. I also find that higher UI benefits decrease annual earnings and monthly wages. This negative effect on incomes continues to persist up to nine years after entry into unemployment. I find no effects of UI benefits on the probability of obtaining a full-time job, the employment probability in subsequent years, the duration of future employment or unemployment spells. In combination, these results suggest that workers gain, in monetary terms, from lower unemployment benefits.Essay 2: (with Bertil Holmlund) The paper develops an equilibrium search and matching model where two-person families as well as singles participate in the labor market. We show that marital status as well as spousal labor market status matter for wage outcomes: members of two-worker families receive higher wages than employed singles and also higher wages than employed members of two-person families where spouses are unemployed. The model is applied to a welfare analysis of alternative unemployment insurance systems, recognizing the role of spousal employment as a partial substitute for public insurance.Essay 3: (with Bertil Holmlund) A significant fraction of the labor force consists of employed workers who are part-time unemployed (underemployed) in the sense that they are unable to work as much as they prefer. This paper develops a search and matching model to study the design of optimal unemployment insurance in an economy with unemployment as well as part-time unemployment. Part-time unemployment provides income insurance and serves also as a stepping stone to full-time jobs. Unemployment benefits for part-timers increase the outflow from unemployment to part-time work but reduce the outflow from part-time work to full-time employment. We examine the optimal structure of benefits for unemployed and underemployed workers. The results indicate non-negligible welfare gains associated with time limits for unemployment benefits as well as for part-time benefits. The welfare gains from optimal UI are larger when wages are fixed than when they are flexible.Essay 4: This paper studies whether the optimal unemployment benefit levels should vary over the business cycle. Previous research suggests that policy makers should indeed make unemployment insurance (UI) dependent on the business cycle because the UI can be used to smooth consumption across different economic states. However, high benefits increase unemployment. An alternative way to redistribute income is to vary tax rates over the business cycle. In this paper, we develop an equilibrium search and matching model with risk-averse workers and two states, namely, a good and a bad state. The model yields potential ambiguity concerning the welfare effects of business cycle-dependent UI. The model is calibrated to United States (U.S.) labor market data. The numerical results suggest that higher benefits in the bad state are optimal, but the benefit differential is small. A more efficient way for policy makers to redistribute income over the business cycle is to decrease consumption taxes in the bad state. Compared to an optimal uniform system, however, differentiation yields small welfare gains. Nevertheless, imposing two tax rates strictly dominates imposing two benefit levels. This finding is robust to a wide range of sensitivity checks.
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