Human Capital Accumulation and the Optimal Level of Unemployment Insurance Provision
Previous studies of optimal unemployment insurance design ignore the impact of unemployment insurance on human capital investment decisions. The authors show that fully experience-rated unemployment insurance increases investment in human capital when future employment opportunities are not known with certainty. In the presence of wage taxation, the optimal level of unemployment insurance trades off full insurance and the impact, through human capital, of unemployment insurance on the wage tax base. This trade-off, in turn, depends on the extent to which human capital accumulation reallocates labor between market and untaxed nonmarket activities. Taxation of unemployment insurance benefits increases the optimal level of unemployment insurance provision. Copyright 1988 by University of Chicago Press.
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