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Productivity insurance: the role of unemployment benefits in a multi-sector model

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  • David L. Fuller
  • Marianna Kudlyak
  • Damba Lkhagvasuren

Abstract

We construct a multi-sector search and matching model where the unemployed receive idiosyncratic productivity shocks that make working in certain sectors more productive than in the others. Agents must decide which sector to search in and face moving costs when leaving their current sector for another. In this environment, unemployment is associated with an additional risk: low future wages if mobility costs preclude search in the appropriate sector. This introduces a new role for unemployment benefits—productivity insurance while unemployed. Analytically, we characterize two competing effects of benefits on productivity, a moral hazard effect and a consumption effect. In a stylized quantitative analysis, we show that the consumption effect dominates, so that unemployment benefits increase per-worker productivity. We also analyze the welfare-maximizing benefit level and find that it decreases as moving costs increase.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-11.

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Date of creation: 2013
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Handle: RePEc:fip:fedrwp:13-11

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  2. Kevin M. Murphy & Robert H. Topel, 1987. "The Evolution of Unemployment in the United States: 1968 — 1985," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 11-68 National Bureau of Economic Research, Inc.
  3. Fernando Álvarez-Parra & Juan M. Sanchez, 2009. "Unemployment insurance with a hidden labor market," Working Paper 09-09, Federal Reserve Bank of Richmond.
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  9. Kurt Mitman & Stanislav Rabinovich, 2011. "Pro-cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model," PIER Working Paper Archive 11-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  10. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
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  12. Kambourov, Gueorgui & Manovskii, Iourii, 2004. "Occupational Mobility and Wage Inequality," IZA Discussion Papers 1189, Institute for the Study of Labor (IZA).
  13. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
  14. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
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  16. Moscarini, Giuseppe & Vella, Francis, 2008. "Occupational Mobility and the Business Cycle," IZA Discussion Papers 3369, Institute for the Study of Labor (IZA).
  17. Lkhagvasuren, Damba, 2012. "Big locational unemployment differences despite high labor mobility," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 798-814.
  18. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February.
  19. Moscarini, Giuseppe & Thomsson, Kaj, 2006. "Occupational and Job Mobility in the US," Working Papers 19, Yale University, Department of Economics.
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  1. Productivity insurance: the role of unemployment benefits in a multi-sector model
    by Christian Zimmermann in NEP-DGE blog on 2013-09-28 02:47:04

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