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Duration-Dependent Unemployment Insurance Payments and Equilibrium Unemployment

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  • Melvyn Coles
  • Adrian Masters

Abstract

This paper develops a model of equilibrium unemployment with duration-dependent unemployment insurance (UI) payments. As the government does not observe job offers, there is a moral hazard problem because the option of receiving further UI payments raises the job-seeker's value of remaining unemployment. Extending the duration of UI payments while reducing the level of payments, to hold total generosity constant, results in higher negotiated wages. Simulations suggest that a generosity neutral switch from a six-month UI scheme to a one-year scheme has small effects, but a switch to an indefinite scheme has a large impact on wages and unemployment. Copyright The London School of Economics and Political Science 2004.

Suggested Citation

  • Melvyn Coles & Adrian Masters, 2004. "Duration-Dependent Unemployment Insurance Payments and Equilibrium Unemployment," Economica, London School of Economics and Political Science, vol. 71, pages 83-97, February.
  • Handle: RePEc:bla:econom:v:71:y:2004:i::p:83-97
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    Cited by:

    1. Ortega, Javier & Rioux, Laurence, 2010. "On the extent of re-entitlement effects in unemployment compensation," Labour Economics, Elsevier, vol. 17(2), pages 368-382, April.
    2. Andrey Launov & Irene Schumm & Klaus Walde, 2008. " Estimating insurance and incentive effects of labour market reforms," CDMA Conference Paper Series 0813, Centre for Dynamic Macroeconomic Analysis.
    3. Flórez, Luz A., 2017. "Informal sector under saving: A positive analysis of labour market policies," Labour Economics, Elsevier, vol. 44(C), pages 13-26.
    4. Lollivier, Stefan & Rioux, Laurence, 2005. "A Structural Non-Stationary Model of Job Search: Stigmatization of the Unemployed by Job Offers or Wage Offers?," CEPR Discussion Papers 5108, C.E.P.R. Discussion Papers.
    5. S. Nuray Akin & Brennan Platt, 2012. "Running Out of Time: Limited Unemployment Benefits and Reservation Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 149-170, April.
    6. Melvyn Coles & Adrian Masters, 2006. "Optimal Unemployment Insurance in a Matching Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 109-138, January.
    7. Miquel Faig, 2008. "Labor Market Cycles and Unemployment Insurance Eligibility," 2008 Meeting Papers 183, Society for Economic Dynamics.
    8. Luz Adriana Flórez, 2014. "Optimal Policy with Informal Sector and Endogenous Savings," Borradores de Economia 833, Banco de la Republica de Colombia.

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