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Unemployment Insurance Design: Inducing Moving and Retraining

  • Hassler, John
  • Rodríguez Mora, José Vicente

Evidence suggests that unemployed individuals can sometimes affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex-ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. In particular, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment benefits should increase over the unemployment spell, with an initial period with low benefits and an increase after this period has expired.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6364.

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Date of creation: Jun 2007
Date of revision:
Handle: RePEc:cpr:ceprdp:6364
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  1. John Hassler & José V. Rodriguez Mora, 2002. "Should UI Benefits Really Fall over Time?," CESifo Working Paper Series 804, CESifo Group Munich.
  2. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2005. "A Positive Theory Of Geographic Mobility And Social Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 263-303, 02.
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  9. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  10. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 370-381, 04/05.
  11. 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 546-72, July.
  12. DaVanzo, Julie, 1978. "Does Unemployment Affect Migration?-Evidence from Micro Data," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 504-14, November.
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  17. Holmlund, Bertil, 1997. "Unemployment Insurance in Theory and Practice," Working Paper Series 1997:25, Uppsala University, Department of Economics.
  18. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
  19. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  20. Bartel, Ann P, 1979. "The Migration Decision: What Role Does Job Mobility Play?," American Economic Review, American Economic Association, vol. 69(5), pages 775-86, December.
  21. Hassler, John & Rodriguez Mora, Jose V., 1999. "Employment turnover and the public allocation of unemployment insurance," Journal of Public Economics, Elsevier, vol. 73(1), pages 55-83, July.
  22. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  23. McCormick, Barry, 1997. "Regional unemployment and labour mobility in the UK," European Economic Review, Elsevier, vol. 41(3-5), pages 581-589, April.
  24. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
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