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Who Cares about Unemployment Insurance?

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  • Lifschitz, Avihai
  • Setty, Ofer
  • Yedid-Levi, Yaniv

Abstract

How is the optimal level of unemployment insurance affected when accounting for skill differences? We analyze this question using a general equilibrium model that has a number of key elements: (i) a search and matching friction in the labor market; (ii) workers who have the ability to save and cannot perfectly insure idiosyncratic risks; and (iii) ex-ante heterogeneity in unemployment risk and labor income. Considering a proportional tax and replacement rate UI system, our model suggests an optimal replacement rate of 32%, while a model without ex-ante heterogeneity calls for a much lower replacement rate (12%). We show that both dimensions of heterogeneity are responsible for these results. Specifically, we argue that income differences induce an incentive to redistribute consumption across skill groups. However, given the UI system, such redistribution is feasible only when there are differences in unemployment risk.

Suggested Citation

  • Lifschitz, Avihai & Setty, Ofer & Yedid-Levi, Yaniv, 2013. "Who Cares about Unemployment Insurance?," Foerder Institute for Economic Research Working Papers 275784, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275784
    DOI: 10.22004/ag.econ.275784
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    References listed on IDEAS

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    1. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(4), pages 1477-1507.
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    Cited by:

    1. Regis Barnichon & Yanos Zylberberg, 2022. "A Menu of Insurance Contracts for the Unemployed [The Effect of Unemployment Insurance Sanctions on the Transition Rate from Unemployment to Employment]," Review of Economic Studies, Oxford University Press, vol. 89(1), pages 118-141.
    2. Zhen Huo & José-Víctor Ríos-Rull, 2016. "Financial Frictions, Asset Prices, and the Great Recession," Staff Report 526, Federal Reserve Bank of Minneapolis.

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