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

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  17. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
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  21. 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, vol. 112(3), pages 913-37, August.
  22. Green, David A & Riddell, W Craig, 1997. "Qualifying for Unemployment Insurance: An Empirical Analysis," Economic Journal, Royal Economic Society, vol. 107(440), pages 67-84, January.
  23. Moffitt, Robert & Nicholson, Walter, 1982. "The Effect of Unemployment Insurance on Unemployment: The Case of Federal Supplemental Benefits," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 1-11, February.
  24. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July.
  25. Hamermesh, Daniel S, 1979. "Entitlement Effects, Unemployment Insurance and Employment Decisions," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 317-32, July.
  26. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 19-50.
  27. Topel, Robert H, 1984. "Equilibrium Earnings, Turnover, and Unemployment: New Evidence," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 500-522, October.
  28. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 47-82, June.
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