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Unemployment Insurance Eligibility, Moral Hazard and Equilibrium Unemployment

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  • 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 consideration of the 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 (2008) strategy of adopting a high value of non-market activities to generate realistic business cycles with the Mortensen-Pissarides model.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-405.

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Length: 27 pages
Date of creation: 09 Jun 2010
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-405

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Related research

Keywords: Search; Matching; Moral Hazard; UI Entitlement; Equilibrium Unemployment; Labor Markets;

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References

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  23. James Costain & Michael Reiter, 2005. "Business Cycles, Unemployment Insurance and the Calibration of Matching Models," Working Papers 215, Barcelona Graduate School of Economics.
  24. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  25. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 25-49, March.
  26. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 50-65, March.
  27. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 44(1), pages 47-82, June.
  28. Topel, Robert H, 1984. "Equilibrium Earnings, Turnover, and Unemployment: New Evidence," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 2(4), pages 500-522, October.
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  30. Anderson, Patricia M & Meyer, Bruce D, 1997. "Unemployment Insurance Takeup Rates and the After-Tax Value of Benefits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 913-37, August.
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