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When Might Unemployment Insurance Matter?

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Author Info
Thomas Crossley
Hamish Low

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Abstract

Unemployment insurance is more valuable when self-insurance is more diffcult. Self-insurance is more viable when the cost of borrowing and the cost of saving are low. The cost of savings depends on the timing of income and the timing of needs, as well as private and market discount rates. Heterogeneity in any of these factors translates into heterogeneity in the cost of saving and thus in the value of unemployment insurance. We develop a life-cycle model to illustrate these connections. We then provide empirical evidence on the extent of credit constraints and heterogeneity in the cost of saving among job losers. Among job losers, 25% do not have access to credit markets. Liquid assets that can be used to buffer employment shocks are lower for households with children (high needs). Among older households, those with illiquid pension wealth have less liquid wealth.

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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2004-04.

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Length: 49 pages
Date of creation: Apr 2004
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Handle: RePEc:mcm:deptwp:2004-04

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Find related papers by JEL classification:
H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rasmus Lentz, 2003. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," CAM Working Papers 2004-10, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  2. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February. [Downloadable!] (restricted)
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  4. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July. [Downloadable!] (restricted)
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  5. Rogerson, Richard & Schindler, Martin, 2002. "The welfare costs of worker displacement," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1213-1234, September. [Downloadable!] (restricted)
  6. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February. [Downloadable!] (restricted)
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  7. Silvio Rendon, 2002. "Job Search and Asset Accumulation under Borrowing Constraints," Economics Working Papers 649, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  8. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October. [Downloadable!] (restricted)
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  9. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 865-88, October. [Downloadable!] (restricted)
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  10. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December. [Downloadable!] (restricted)
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  13. Sule Alan & Martin Browning, 2003. "Estimating Intertemporal Allocation Parameters using Simulated Residual Estimation," CAM Working Papers 2003-03, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
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  15. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  16. Bloemen, Hans G. & Stancanelli, Elena G.F., 2001. "Financial wealth, consumption smoothing, and income shocks due to job loss," Serie Research Memoranda 0036, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
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  17. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  18. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February. [Downloadable!] (restricted)
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  19. James X. Sullivan, 2005. "Borrowing during unemployment: unsecured debt as a safety net," Proceedings, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
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  20. James Costain, 1997. "Unemployment Insurance with Endogenous Search Intensity and Precautionary Saving," Economics Working Papers 243, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  21. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November. [Downloadable!] (restricted)
  22. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2002. "The Importance of Bequests and Life-Cycle Saving in Capital Accumulation: A New Answer," American Economic Review, American Economic Association, vol. 92(2), pages 274-278, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Martin Browning & Thomas F. Crossley, 2006. "The Long-Run Cost of Job Loss as Measured by Consumption Changes," Social and Economic Dimensions of an Aging Population Research Papers 152, McMaster University. [Downloadable!]
    Other versions:
  2. Raj Chetty, 2005. "Why do Unemployment Benefits Raise Unemployment Durations? Moral Hazard vs. Liquidity," NBER Working Papers 11760, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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