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Labor Market Cycles and Unemployment Insurance Eligibility

  • Miquel Faig

    (University of Toronto)

If entitlement to UI benefits must be earned with employment, generous UI is an additional benefit to an employment relationship, so it promotes job creation. If individuals are risk neutral, UI is fairly priced, and the UI system prevents moral-hazard unemployed workers, the generosity of UI has no effect on unemployment. As with Ricardian Equivalence, this result should be useful to pinpoint the effects of UI to violation of its premises. In itself, the endogenous entitlement of UI benefits does not resolve if the Mortensen-Pissarides model is able to generate realistic cycles. However, it brings some insights into this debate: The widespread concern in the design of UI systems to minimize moral-hazard unemployment only makes sense if workers have sufficiently high values of leisure (80 percent of labor productivity in our baseline calculation for the United States). The fact that the generosity of UI has potentially a small effect on unemployment reconciles a high response of unemployment to changes in labor productivity with a small response to changes in UI benefits.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 183.

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Date of creation: 2008
Handle: RePEc:red:sed008:183
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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