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Duration-Dependent Unemployment Insurance Payments and Equilibrium Unemployment

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  • Melvyn Coles
  • Adrian Masters

Abstract

This paper develops a model of equilibrium unemployment with duration-dependent unemployment insurance (UI) payments. As the government does not observe job offers, there is a moral hazard problem because the option of receiving further UI payments raises the job-seeker's value of remaining unemployment. Extending the duration of UI payments while reducing the level of payments, to hold total generosity constant, results in higher negotiated wages. Simulations suggest that a generosity neutral switch from a six-month UI scheme to a one-year scheme has small effects, but a switch to an indefinite scheme has a large impact on wages and unemployment. Copyright The London School of Economics and Political Science 2004.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 71 (2004)
Issue (Month): (02)
Pages: 83-97

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Handle: RePEc:bla:econom:v:71:y:2004:i::p:83-97

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Cited by:
  1. Melvyn Coles & Adrian Masters, 2006. "Optimal Unemployment Insurance in a Matching Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 109-138, January.
  2. Ortega, Javier & Rioux, Laurence, 2007. "On the Extent of Re-Entitlement Effects in Unemployment Compensation," IZA Discussion Papers 2807, Institute for the Study of Labor (IZA).
  3. Lollivier, Stefan & Rioux, Laurence, 2005. "A Structural Non-Stationary Model of Job Search: Stigmatization of the Unemployed by Job Offers or Wage Offers?," CEPR Discussion Papers 5108, C.E.P.R. Discussion Papers.
  4. Miquel Faig & Min Zhang, 2010. "Labor Market Cycles and Unemployment Insurance Eligibility," Working Papers tecipa-404, University of Toronto, Department of Economics.
  5. S. Nuray Akin & Brennan Platt, 2012. "Running Out of Time: Limited Unemployment Benefits and Reservation Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 149-170, April.

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