Unemployment insurance and job polarization

This paper considers how the structure of the UI system interacts with the observed profile of separations to generate “job-polarization” – wage and separation rate persistence. We extend a standard on-the-job labor search model to include an initial period of high separation rates until the job stochastically becomes more stable. Meanwhile a worker’s UI entitlement varies in generosity (based on their former wage) and duration (based on their employment history). The separation structure means that some workers have extended periods of frequent job loss. The UI system amplifies these effects because workers with low benefit eligibility apply for low wage jobs. Their subsequent applications then leave them more highly susceptible to future job loss. Our calibration suggests that this effect accounts for around 1% lower lifetime average wages.