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Unemployment Insurance Take-up Rates in an Equilibrium Search Model

In the US unemployment insurance (UI) system, only a fraction of those eligible for benefits actually collect them. We estimate this fraction using CPS data and detailed state-level eligibility criteria. We find that the fraction of eligible unemployed collecting benefits has been persistently below one, and is countercyclical. We show these empirical facts can be explained in an equilibrium search model where firms finance UI benefits via a payroll tax, and are heterogeneous with respect to their specific tax rate, which is experience rated. In equilibrium, low tax firms effectively offer workers an alternative UI scheme featuring a faster job arrival rate and a higher wage offer. Some eligible workers prefer the ``market'' scheme and thus do not collect UI. Quantitatively, the model does well matching key moments in the data. In addition, if all eligible unemployed collect, benefit expenditures increase by 29% and welfare increases by 0.43%. Average search effort decreases, but the unemployment rate and duration decrease as vacancy creation increases.

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Paper provided by Concordia University, Department of Economics in its series Working Papers with number 13001.

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Length: 40 pages
Date of creation: 26 Jun 2013
Date of revision:
Handle: RePEc:crd:wpaper:13001
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  1. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  2. David L. Fuller & B. Ravikumar & Yuzhe Zhang, 2012. "Unemployment insurance fraud and optimal monitoring," Working Papers 2012-024, Federal Reserve Bank of St. Louis.
  3. Rebecca Blank & David Card & Whitney Newey, 1988. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," Working Papers 623, Princeton University, Department of Economics, Industrial Relations Section..
  4. Carl Davidson & Stephen A. Woodbury, 1997. "The Optimal Dole with Risk Aversion, Job Destruction, and Worker Heterogeneity," Upjohn Working Papers and Journal Articles 97-47, W.E. Upjohn Institute for Employment Research.
  5. Wang, Cheng & Williamson, Stephen D., 2002. "Moral Hazard, Optimal Unemployment Insurance and Experience Rating," Staff General Research Papers 10133, Iowa State University, Department of Economics.
  6. Makoto Nakajima, 2011. "A quantitative analysis of unemployment benefit extensions," Working Papers 11-8, Federal Reserve Bank of Philadelphia.
  7. Michael Pries, 2008. "Worker Heterogeneity and Labor Market Volatility in Matching Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 664-678, July.
  8. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
  9. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  10. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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