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Labor Market Cycles and Unemployment Insurance Eligibility

  • Miquel Faig
  • Min Zhang

If entitlement to Unemployment Insurance (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, 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). Also, 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 University of Toronto, Department of Economics in its series Working Papers with number tecipa-404.

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Length: 51 pages
Date of creation: 31 May 2010
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-404
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