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Does incomplete take-up matter? The case of Unemployment Insurance

Author

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  • Guimarães, Luis
  • Lourenço, Diogo

Abstract

Only a few of the eligible take up Unemployment Insurance (UI). Yet, the literature evaluating UI in macroeconomic settings typically assumes that take-up is costless and complete. We show that this assumption leads to an overestimation of UI’s net welfare gains in a general equilibrium model with incomplete markets. In fact, when we account for incomplete take-up, we find that the current UI program lowers welfare in the US. Take-up costs are key: they lower individual net gains from UI to the extent that they fail to outweigh the program’s aggregate distortions. Suitably reformed, UI could slightly increase welfare. A uniform transfer of about USD 500 for 14 months to UI recipients would discourage take-up among the better off, reducing distortions and take-up costs, and enhancing redistribution.

Suggested Citation

  • Guimarães, Luis & Lourenço, Diogo, 2026. "Does incomplete take-up matter? The case of Unemployment Insurance," MPRA Paper 128341, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:128341
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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