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Labor Market Cycles, Unemployment Insurance Eligibility, and Moral Hazard

  • Miquel Faig

    (University of Toronto)

  • Min Zhang

    (Shanghai University of Finance and Economics)

If entitlement to UI benefits must be earned with employment, generous UI is an additional benefit to working, so, by itself, it promotes job creation. If individuals are risk neutral, then there is a UI contribution scheme that eliminates any effect of UI on employment decisions. As with Ricardian Equivalence, this result should be useful to pinpoint the effects of UI to violations of its premises. Our baseline simulation shows that if the neutral contribution scheme derived in this paper were to be implemented, the average unemployment rate in the United States would fall from 5.7 to 4.7 percent. Also, the results show that with endogenous UI eligibility, one can simultaneously generate realistic productivity driven cycles and realistic responses of unemployment to changes in UI benefits. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 15 (2012)
Issue (Month): 1 (January)
Pages: 41-56

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Handle: RePEc:red:issued:10-112
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  1. Miquel Faig & Min Zhang, 2010. "Labor Market Cycles and Unemployment Insurance Eligibility," Working Papers tecipa-404, University of Toronto, Department of Economics.
  2. Dale Mortensen & Eva Nagypal, 2007. "More on Unemployment and Vacancy Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 327-347, July.
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  7. University of Toronto & Min Zhang, 2009. "Unemployment Insurance Eligibility, Moral Hazard and Equilibrium Unemployment," 2009 Meeting Papers 102, Society for Economic Dynamics.
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  10. Bruce D. Meyer & Wallace K. C. Mok, 2007. "Quasi-Experimental Evidence on the Effects of Unemployment Insurance from New York State," NBER Working Papers 12865, National Bureau of Economic Research, Inc.
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  24. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
  25. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  26. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
  27. Zhang Min, 2008. "Cyclical Behavior of Unemployment and Job Vacancies: A Comparison between Canada and the United States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-37, October.
  28. 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.
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