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A life-cycle model of unemployment and disability insurance

  • Sagiri Kitao

    (Hunter College)

The paper builds a life-cycle model of heterogeneous agents with search frictions, in which individuals choose a sequence of saving and labor supply faced with uncertainty in longevity, employment, health status and medical expenditures. Unemployed individuals decide search intensity and whether to apply for disability insurance (DI) benefits if eligible. We investigate, first, the effects of cash and Medicare benefits of the DI system on the life-cycle pattern of employment. Without in-kind benefits through Medicare, the DI coverage could fall by 30%. Second, the impact of a change in labor market conditions and roles of the DI are studied. A rise in exogenous job separation rates or a fall in job finding rates by 20% each can lead to a drop in employment rate by 1.7 and 2.1 percentage points, respectively. A model without the DI could underestimate the effect on employment by more than 30%.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 439.

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Date of creation: 2013
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Handle: RePEc:red:sed013:439
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