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Unemployment Insurance And Experience Rating: Insurance Versus Efficiency

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  • Steeve Mongrain
  • Joanne Roberts

Abstract

Unemployment insurance (UI) distorts firms' layoff decisions by reducing the cost of laying off workers. To dampen this increase, it has been suggested that UI should be financed with an experience-rated tax. Despite the fact that increasing the level of experience rating can reduce unemployment, it can reduce the insurance coverage workers receive. With high experience rating, firms may reduce their severance payments by more than the UI benefit. We build a model where competitive firms offer contracts with severance payments to risk-averse workers. Frictions in the labor market lead to incomplete insurance. This article shows that less than full-experience rating enables the government to increase the insurance coverage workers receive. Welfare implications are also investigated. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • Steeve Mongrain & Joanne Roberts, 2005. "Unemployment Insurance And Experience Rating: Insurance Versus Efficiency ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1303-1319, November.
    • Handle: RePEc:ier:iecrev:v:46:y:2005:i:4:p:1303-1319
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    Cited by:

    1. Beblavý, Miroslav & Lenaerts, Karolien & Maselli, Ilaria, 2017. "Design of a European Unemployment Benefit Scheme," CEPS Papers 12263, Centre for European Policy Studies.
    2. Andrey Launov & Irene Schumm & Klaus Walde, 2008. "Estimating insurance and incentive effects of labour market reforms," CDMA Conference Paper Series 0813, Centre for Dynamic Macroeconomic Analysis.
    3. Mikhail Golosov & Pricila Maziero & Guido Menzio, 2013. "Taxation and Redistribution of Residual Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1160-1204.
    4. L'Haridon, Olivier & Malherbet, Franck, 2009. "Employment protection reform in search economies," European Economic Review, Elsevier, vol. 53(3), pages 255-273, April.
    5. Olivier Charlot & Franck Malherbet, 2010. "Réforme de la protection de l'emploi et inégalités face au chômage dans un modèle d'appariement," Recherches économiques de Louvain, De Boeck Université, vol. 76(1), pages 57-112.
    6. Sahin Avcioglu & Bilgehan Karabay, 2020. "Labor market regulation under self‐enforcing contracts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1965-2018, December.
    7. Michau, Jean-Baptiste, 2015. "Optimal labor market policy with search frictions and risk-averse workers," Labour Economics, Elsevier, vol. 35(C), pages 93-107.

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