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Unemployment Insurance Eligibility, Moral Hazard and Equilibrium Unemployment

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  • University of Toronto
  • Min Zhang

Abstract

This paper shows that the Mortensen-Pissarides search and matching model can be successfully parameterized to generate observed large cyclical fluctuations in unemployment and modest responses of unemployment to changes in unemployment insurance (UI) benefits. The key features behind this success are the endogenous eligibility for UI benefits and the heterogeneity of workers. With the linear utilities commonly assumed in the Mortensen-Pissarides model, a fully rated UI system designed to prevent moral hazard has no effect on unemployment. However, the UI system in the United States is neither fully rated nor able to prevent workers with low productivity from quitting their jobs or rejecting employment offers to collect benefits. As a result, an increase in UI generosity has a positive, but realistically small, effect on unemployment. This paper answers the Costain and Reiter (2008) criticism to the Hagedorn and Manovskii (2007) strategy of adopting a high value of non-market activities to generate realistic business cycles with the Mortensen-Pissarides model.

Suggested Citation

  • University of Toronto & Min Zhang, 2009. "Unemployment Insurance Eligibility, Moral Hazard and Equilibrium Unemployment," 2009 Meeting Papers 102, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:102
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    Cited by:

    1. Miyamoto Hiroaki, 2011. "Cyclical Behavior of a Matching Model with Capital Investment," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-25, January.
    2. Miquel Faig & Min Zhang, 2012. "Labor Market Cycles, Unemployment Insurance Eligibility, and Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 41-56, January.

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