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Worker Heterogeneity and Optimal Unemployment Insurance: The Surprising Power of the Floor

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  • Simon J. Heiler

Abstract

Incentives to search for employment vary systematically with age and idiosyncratic labor productivity. These variations should be accounted for when designing UI policy, yet conditioning on related factors can be difficult or infeasible in practice. Using a life cycle model with endogenous human capital accumulation, idiosyncratic labor risk, and permanent differences in worker productivity, I analyze optimal UI policies. I find that for the U.S. an age-and-type-dependent policy generates welfare gains equal to 0.3 percentage points of consumption in all states and periods relative to a constant a replacement rate. Moreover, I demonstrate that about 80% of the gains from conditioning replacement rates on age only and about 60% of the welfare gains from conditioning on age and productivity can be generated by the current U.S. UI system. This can be achieved by substantially raising the benefit floor, a feature of the U.S. UI system that is largely ineffective in its current implementation.

Suggested Citation

  • Simon J. Heiler, 2024. "Worker Heterogeneity and Optimal Unemployment Insurance: The Surprising Power of the Floor," CRC TR 224 Discussion Paper Series crctr224_2024_545, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_545
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp545
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    References listed on IDEAS

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    1. Pontus Rendahl, 2012. "Asset‐Based Unemployment Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(3), pages 743-770, August.
    2. Shaw, Kathryn L, 1989. "Life-Cycle Labor Supply with Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 431-456, May.
    3. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, May.
    4. Cullen, Julie Berry & Gruber, Jonathan, 2000. "Does Unemployment Insurance Crowd Out Spousal Labor Supply?," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 546-572, July.
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    More about this item

    Keywords

    Unemployment Insurance; Worker Heterogeneity; Lifecycle;
    All these keywords.

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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