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Unemployment insurance design: inducing moving and retraining

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  • Hassler, John
  • Rodríguez Mora, José Vicente

Abstract

Evidence suggests that unemployed individuals can sometimes affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex-ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. In particular, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment benefits should increase over the unemployment spell, with an initial period with low benefits and an increase after this period has expired Keywords; unemployment benefits, search, moral hazard, adverse selection

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Bibliographic Info

Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0702.

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Date of creation: 29 Jun 2007
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Handle: RePEc:stn:sotoec:0702

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  1. Wang, Cheng & Williamson, Steve, 1996. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Staff General Research Papers, Iowa State University, Department of Economics 5088, Iowa State University, Department of Economics.
  2. Williamson, S. & Wang, C., 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Working Papers, University of Iowa, Department of Economics 95-09, University of Iowa, Department of Economics.
  3. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 412-38, April.
  4. John Hassler & José Vicente Rodríguez Mora, 2003. "A Positive Theory of Geographic Mobility and Social Insurance," Working Papers 97, Barcelona Graduate School of Economics.
  5. Hassler, John & Rodriguez Mora, José V., 2002. "Should UI Benefits Really Fall Over Time?," IZA Discussion Papers 622, Institute for the Study of Labor (IZA).
  6. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," CEPR Discussion Papers, Centre for Economic Policy Research, Research School of Economics, Australian National University 380, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  7. DaVanzo, Julie, 1978. "Does Unemployment Affect Migration?-Evidence from Micro Data," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 504-14, November.
  8. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
  9. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1612-1630, September.
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  11. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, Elsevier, vol. 77(1), pages 135-153, July.
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  19. Wright, Randall, 1986. "The redistributive roles of unemployment insurance and the dynamics of voting," Journal of Public Economics, Elsevier, Elsevier, vol. 31(3), pages 377-399, December.
  20. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 10(3), pages 379-402, December.
  21. David Card & Raj Chetty & Andrea Weber, 2006. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," NBER Working Papers 12639, National Bureau of Economic Research, Inc.
  22. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 370-381, 04/05.
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Cited by:
  1. Christian Bayer & Klaus Wälde, 2010. "Matching and Saving in Continuous Time: Theory," Working Papers, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz 1004, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 13 Jan 2010.
  2. Kjell Erik Lommerud & Odd Rune Straume, 2012. "Employment Protection Versus Flexicurity: On Technology Adoption in Unionised Firms," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 114(1), pages 177-199, 03.
  3. Lommerud, Kjell Erik & Straume, Odd Rune, 2007. "Technology resistance and globalisation with trade unions: the choice between employment protection and flexicurity," Working Papers in Economics, University of Bergen, Department of Economics 13/07, University of Bergen, Department of Economics.

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