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When Might Unemployment Insurance Matter?


  • Thomas Crossley
  • Hamish Low


Unemployment insurance is more valuable when self-insurance is more diffcult. Self-insurance is more viable when the cost of borrowing and the cost of saving are low. The cost of savings depends on the timing of income and the timing of needs, as well as private and market discount rates. Heterogeneity in any of these factors translates into heterogeneity in the cost of saving and thus in the value of unemployment insurance. We develop a life-cycle model to illustrate these connections. We then provide empirical evidence on the extent of credit constraints and heterogeneity in the cost of saving among job losers. Among job losers, 25% do not have access to credit markets. Liquid assets that can be used to buffer employment shocks are lower for households with children (high needs). Among older households, those with illiquid pension wealth have less liquid wealth.

Suggested Citation

  • Thomas Crossley & Hamish Low, 2004. "When Might Unemployment Insurance Matter?," Department of Economics Working Papers 2004-04, McMaster University.
  • Handle: RePEc:mcm:deptwp:2004-04

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    References listed on IDEAS

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    Cited by:

    1. Browning, Martin & Crossley, Thomas F., 2008. "The long-run cost of job loss as measured by consumption changes," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 109-120, July.
    2. Raj Chetty, 2005. "Why do Unemployment Benefits Raise Unemployment Durations? Moral Hazard vs. Liquidity," NBER Working Papers 11760, National Bureau of Economic Research, Inc.
    3. Ralph Stinebrickner & Todd Stinebrickner, 2008. "The Effect of Credit Constraints on the College Drop-Out Decision: A Direct Approach Using a New Panel Study," American Economic Review, American Economic Association, vol. 98(5), pages 2163-2184, December.

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    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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