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Productivity insurance: the role of unemployment benefits in a multi-sector model

  • David L. Fuller
  • Marianna Kudlyak
  • Damba Lkhagvasuren

We construct a multi-sector search and matching model where the unemployed receive idiosyncratic productivity shocks that make working in certain sectors more productive than in the others. Agents must decide which sector to search in and face moving costs when leaving their current sector for another. In this environment, unemployment is associated with an additional risk: low future wages if mobility costs preclude search in the appropriate sector. This introduces a new role for unemployment benefits—productivity insurance while unemployed. Analytically, we characterize two competing effects of benefits on productivity, a moral hazard effect and a consumption effect. In a stylized quantitative analysis, we show that the consumption effect dominates, so that unemployment benefits increase per-worker productivity. We also analyze the welfare-maximizing benefit level and find that it decreases as moving costs increase.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-11.

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Date of creation: 2013
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Handle: RePEc:fip:fedrwp:13-11
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  13. Damba Lkhagvasuren, 2005. "Big Locational Differences in Unemployment Despite High Labor Mobility," Working Papers 12002, Concordia University, Department of Economics, revised Feb 2012.
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  16. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
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  18. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  19. Stéphane Auray & David Fuller & Damba lkhagvasuren & Antoine Terracol, 2014. "A Dynamic Analysis of Sectoral Mobility, Worker Mismatc and the Wage-Tenure Profiles," Working Papers 2014-12, Centre de Recherche en Economie et Statistique.
  20. Lkhagvasuren, Damba, 2012. "Big locational unemployment differences despite high labor mobility," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 798-814.
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  25. Kevin M. Murphy & Robert H. Topel, 1987. "The Evolution of Unemployment in the United States: 1968 -- 1985," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 11-68 National Bureau of Economic Research, Inc.
  26. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 47-82, June.
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