Understanding the Welfare Effects of Unemployment Insurance Policy in General Equilibrium

This paper analyzes the welfare effects of the change in unemployment insurance benefits in three general equilibrium incomplete market models. In particular, it decomposes the total effect for each individual into different factors. In all of the models that I consider, the consumers face an uninsurable unemployment risk, can save in a interest-bearing asset, and face a borrowing constraint. I find that (i) in the models that are calibrated to the U.S. economy, the welfare benefit of having access to unemployment insurance above the current U.S. level is very limited, (ii) the changes in equilibrium prices tend to create a conflict of interest between poor and rich consumers, (iii) considering the endogenous reaction of the equilibrium unemployment rate to unemployment insurance benefit is important when considering the welfare effect of the change in equilibrium prices, and (iv) an unanticipated change in unemployment insurance benefits involves implicit transfers. Details of the model matter substantially in shaping the total welfare outcome, both through the direct effect on individuals and through the general equilibrium effect.