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Can the Unemployed Borrow? Implications for Public Insurance

Author

Listed:
  • J. Carter Braxton

    (University of Minnesota)

  • Gordon Phillips

    (Dartmouth College)

  • Kyle Herkenhoff

    (University of Minnesota)

Abstract

Do the unemployed have access to credit markets? Yes. Do the unemployed borrow? Yes. We link administrative earnings records with credit reports and show that individuals maintain significant access to credit following job loss. Unconstrained job losers borrow, while constrained job losers default and delever. Both default and borrowing allow job losers to boost consumption, and they pay an interest rate premium to do so, i.e. the credit market acts as a limited private unemployment insurance market. We show theoretically that default costs allow credit markets to serve as a market for private unemployment insurance despite adverse selection and asymmetric information about future job loss. We then ask, given the degree of private unemployment insurance household's have in the data, what is the optimal provision of public unemployment insurance? We find that the optimal provision of public insurance is unambiguously lower as credit access expands. The median voter in our simulated economy would prefer to have the replacement rate lowered from the current US policy of 45% to 35%. However, a utilitarian planner would actually prefer to raise UI relative to current US levels, even in the presence of well-developed credit markets.

Suggested Citation

  • J. Carter Braxton & Gordon Phillips & Kyle Herkenhoff, 2018. "Can the Unemployed Borrow? Implications for Public Insurance," 2018 Meeting Papers 564, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:564
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Can the Unemployed Borrow? Implications for Public Insurance
      by Christian Zimmermann in NEP-DGE blog on 2018-09-28 09:37:30
    2. How Does Credit Access Affect Job-Search Outcomes and Sorting?
      by Blog Author in Liberty Street Economics on 2020-03-04 12:45:00

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    Cited by:

    1. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," Review of Economic Studies, Oxford University Press, vol. 86(6), pages 2605-2642.
    2. Serdar Birinci & Kurt Gerrard See, 2018. "How Should Unemployment Insurance vary over the Business Cycle?," 2018 Meeting Papers 69, Society for Economic Dynamics.
    3. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    4. Kyle F. Herkenhoff & Gajendran Raveendranathan, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," Working Papers 2019-071, Human Capital and Economic Opportunity Working Group.
    5. Ying Feng & David Lagakos & James E. Rauch, 2018. "Unemployment and Development," NBER Working Papers 25171, National Bureau of Economic Research, Inc.
    6. Serdar Birinci & Kurt See, 2019. "Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity," Working Papers 2019-022, Federal Reserve Bank of St. Louis, revised Mar 2021.
    7. Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    8. Rene Chalom & Benjamin Pugsley & Fatih Karahan & Kurt Mitman, 2019. "Liquidity Effects of Unemployment Insurance Benefit Extensions: Evidence from Consumer Credit Data," 2019 Meeting Papers 438, Society for Economic Dynamics.
    9. Sean Hundtofte & Arna Olafsson & Michaela Pagel, 2019. "Credit Smoothing," NBER Working Papers 26354, National Bureau of Economic Research, Inc.
    10. Akos Horvath & Benjamin S. Kay & Carlo Wix, 2021. "The COVID-19 Shock and Consumer Credit: Evidence from Credit Card Data," Finance and Economics Discussion Series 2021-008, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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