Unemployment Insurance and Worker Reallocation: The Experimentation Channel in Job-to-Job Mobility

The risk of job loss is concentrated in the early months of the job; after the initially high levels of unemployment risk, jobs become stable. We argue that this initial excess exposure to unemployment risk renders job-to-job transitions risky. We formalize this mechanism in a search and matching model in which job offers are “lotteries”, placing probabilities on job qualities, which are revealed early on in the new job. Workers know the probability weights, and lotteries are heterogeneous in those weights. A set of job quality realizations lead workers to prefer quitting into unemployment. In this model, job mobility is affected by the value of unemployment, which represents the downside risk of accepting a job lottery. This consideration constitutes a mobility friction for employed workers. We explore all these properties and predictions in a calibrated version of the model. We also highlight a new role of unemployment insurance (UI): In our model, UI insures the downside risk of job-to-job transitions, and thereby subsidizes job mobility of workers already employed, and tilts the job composition to ex-ante riskier jobs. We close by discussing potential implications of this new view of unemployment insurance. Our study therefore sheds light on how labor market policies affect the behavior of employed job seekers through a novel “experimentation subsidy” channel.