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Labor Market Cycles, Unemployment Insurance Eligibility, and Moral Hazard

Author

Listed:
  • Miquel Faig

    (University of Toronto)

  • Min Zhang

    (Shanghai University of Finance and Economics)

Abstract

If entitlement to UI benefits must be earned with employment, generous UI is an additional benefit to working, so, by itself, it promotes job creation. If individuals are risk neutral, then there is a UI contribution scheme that eliminates any effect of UI on employment decisions. As with Ricardian Equivalence, this result should be useful to pinpoint the effects of UI to violations of its premises. Our baseline simulation shows that if the neutral contribution scheme derived in this paper were to be implemented, the average unemployment rate in the United States would fall from 5.7 to 4.7 percent. Also, the results show that with endogenous UI eligibility, one can simultaneously generate realistic productivity driven cycles and realistic responses of unemployment to changes in UI benefits. (Copyright: Elsevier)

Suggested Citation

  • Miquel Faig & Min Zhang, 2012. "Labor Market Cycles, Unemployment Insurance Eligibility, and Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 41-56, January.
    • Handle: RePEc:red:issued:10-112
    DOI: 10.1016/j.red.2011.09.002
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    Cited by:

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    2. Guido Menzio & Irina Telyukova & Ludo Visschers, 2016. "Directed Search over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 38-62, January.
    3. Laura Khoury & Clément Brébion & Simon Briole, 2019. "Entitled to Leave: the Impact of Unemployment Insurance Eligibility on Employment Duration and Job Quality," Working Papers halshs-02393383, HAL.
    4. Martin Gervais & Lawrence Warren & Reza Boostani, 2022. "Optimal unemployment insurance in a directed search model," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1473-1496, October.
    5. Pei, Yun & Xie, Zoe, 2021. "A quantitative theory of time-consistent unemployment insurance," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 848-870.
    6. Xie, Zoe, 2019. "Delayed collection of unemployment insurance in recessions," European Economic Review, Elsevier, vol. 118(C), pages 274-295.
    7. Mitman, Kurt & Rabinovich, Stanislav, 2019. "Do Unemployment Benefit Extensions Explain the Emergence of Jobless Recoveries?," CEPR Discussion Papers 13760, C.E.P.R. Discussion Papers.
    8. Gustavo de Souza & Andre Luduvice, 2022. "Optimal Unemployment Insurance Requirements," Working Paper Series WP 2022-45, Federal Reserve Bank of Chicago.
    9. Andersen, Torben M. & Kristoffersen, Mark Strøm & Svarer, Michael, 2018. "Benefit reentitlement conditions in unemployment insurance schemes," Labour Economics, Elsevier, vol. 52(C), pages 27-39.
    10. Chao He & Min Zhang, 2019. "Business Liquidity, Consumer Liquidity, and Monetary Policy," 2019 Meeting Papers 869, Society for Economic Dynamics.
    11. Andersen, Torben M & Ellermann-Aarslev, Christian, 2017. "Job duration and history dependent unemployment insurance," CEPR Discussion Papers 12163, C.E.P.R. Discussion Papers.
    12. Xie, Zoe, 2015. "Delayed Collection of Unemployment Insurance during Recessions," MPRA Paper 76564, University Library of Munich, Germany.
    13. Mitman, Kurt & Rabinovich, Stanislav, 2015. "Optimal unemployment insurance in an equilibrium business-cycle model," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 99-118.
    14. Kurt Mitman & Stanislav Rabinovich, 2014. "Unemployment Benefit Extensions Caused Jobless Recoveries!?," PIER Working Paper Archive 14-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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    More about this item

    Keywords

    Search; Matching; UI eligibility; Moral hazard; Unemployment; Business cycles; Labor markets;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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