The Implications of Labor Market Heterogeneity on Unemployment Insurance Design

We digitize state-level and time-varying unemployment insurance (UI) laws on initial eligibility, payment amount, and payment duration 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 levels of income and wealth 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 combined with a frictional labor market that matches our empirical findings. We show that a nested alternative model that fails to match these findings yields a substantially less generous optimal UI policy compared to the baseline model. Our empirical results are also relevant for researchers estimating the effects of UI policy changes on labor market outcomes.