Optimal Unemployment Insurance with Worker Profiling

I study the design of an optimal profiling policy within welfare-to-work programs, by embedding dynamic learning about worker’s ability into the principal-agent framework of Pavoni and Violante (2007). In optimal profiling, a fraction of low-skilled workers is persuaded to be highly skilled and referred to delegated search together with actual high-skilled workers (positive type-II error), whenever the government prefers to have over-optimist low-skilled workers searching for jobs (at small incentive costs) rather than referring them to passive labor-market policies. On the contrary, no high-skilled worker is ever profiled as low skilled and referred to any passive policy (zero type-I error). To ease agency costs, workers who are profiled on a statistical basis and referred to delegated search suffer a reduction in the generosity of transfers. In Florida, the optimal profiling program would generate around 540 millions USD savings each year