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Life Cycle UI with ex-ante Heterogeneous Workers

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  • Heiler, Simon

Abstract

The incentives to search for employment vary systematically over the life cycle and with idiosyncratic productivity. These variations should be accounted for when designing UI policy. Using a life cycle model with endogenous human capital accumulation and permanent differences in worker productivity, I assess the welfare implications from optimally setting effective UI replacement rates. Welfare gains are sizeable, both absolute and relative to the size of the program, amounting to up to 0.7% of consumption in all periods and states or roughly 30% of the size of the UI program. Moreover, I demonstrate that the entire gains from conditioning replacement rates on age only and about three quarters of the welfare gains from conditioning on age and productivity can be generated by a simple and robust implementation inspired by the current U.S. UI system, featuring only a constant replacement rate, a benefit floor, and a benefit cap.

Suggested Citation

  • Heiler, Simon, 2021. "Life Cycle UI with ex-ante Heterogeneous Workers," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242461, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc21:242461
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    File URL: https://www.econstor.eu/bitstream/10419/242461/1/vfs-2021-pid-50643.pdf
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    References listed on IDEAS

    as
    1. Claudio Michelacci & Hernán Ruffo, 2015. "Optimal Life Cycle Unemployment Insurance," American Economic Review, American Economic Association, vol. 105(2), pages 816-859, February.
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    More about this item

    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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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