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Unemployment Insurance Eligibility, Moral Hazard and Equilibrium Unemployment

  • Min Zhang

This paper shows that the Mortensen-Pissarides search and matching model can be successfully parameterized to generate observed large cyclical fluctuations in unemployment and modest responses of unemployment to changes in unemployment insurance (UI) benefits. The key features behind this success are the consideration of the eligibility for UI benefits and the heterogeneity of workers. With the linear utilities commonly assumed in the Mortensen-Pissarides model, a fully rated UI system designed to prevent moral hazard has no effect on unemployment. However, the UI system in the United States is neither fully rated nor able to prevent workers with low productivity from quitting their jobs or rejecting employment offers to collect benefits. As a result, an increase in UI generosity has a positive, but realistically small, effect on unemployment. This paper answers the Costain and Reiter (2008) criticism to the Hagedorn and Manovskii (2008) strategy of adopting a high value of non-market activities to generate realistic business cycles with the Mortensen-Pissarides model.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-405.

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Length: 27 pages
Date of creation: 09 Jun 2010
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-405
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  1. Burdett, Kenneth, 1979. "Unemployment Insurance Payments as a Search Subsidy: A Theoretical Analysis," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 333-43, July.
  2. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  3. Coles, Melvyn & Masters, Adrian, 2007. "Re-entitlement effects with duration-dependent unemployment insurance in a stochastic matching equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 2879-2898, September.
  4. Christopher A. Pissarides, 2007. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," CEP Discussion Papers dp0839, Centre for Economic Performance, LSE.
  5. James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
  6. Gary Solon, 1984. "Work Incentive Effects of Taxing Unemployment Benefits," NBER Working Papers 1260, National Bureau of Economic Research, Inc.
  7. James Albrecht & Susan Vroman, 2005. "Equilibrium Search With Time-Varying Unemployment Benefits," Economic Journal, Royal Economic Society, vol. 115(505), pages 631-648, 07.
  8. Rebecca Blank & David Card & Whitney Newey, 1988. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," Working Papers 623, Princeton University, Department of Economics, Industrial Relations Section..
  9. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 47-82, June.
  10. Moffitt, Robert & Nicholson, Walter, 1982. "The Effect of Unemployment Insurance on Unemployment: The Case of Federal Supplemental Benefits," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 1-11, February.
  11. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
  12. van den Berg, Gerard J, 1990. "Nonstationarity in Job Search Theory," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 255-77, April.
  13. Topel, Robert H, 1984. "Equilibrium Earnings, Turnover, and Unemployment: New Evidence," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 500-522, October.
  14. Mortensen, Dale T. & Nagypál, Éva, 2005. "More on Unemployment and Vacancy Fluctuations," IZA Discussion Papers 1765, Institute for the Study of Labor (IZA).
  15. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, vol. 92(2), pages 1-15, May.
  16. Shigeru Fujita & Garey Ramey, 2009. "The Cyclicality Of Separation And Job Finding Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, 05.
  17. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  18. David Card & W. Craig Riddell, 1993. "A Comparative Analysis of Unemployment in Canada and the United States," NBER Chapters, in: Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States, pages 149-190 National Bureau of Economic Research, Inc.
  19. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
  20. Lawrence Katz & Bruce Meyer, 1988. "The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment," Working Papers 621, Princeton University, Department of Economics, Industrial Relations Section..
  21. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
  22. Green, David A & Riddell, W Craig, 1997. "Qualifying for Unemployment Insurance: An Empirical Analysis," Economic Journal, Royal Economic Society, vol. 107(440), pages 67-84, January.
  23. Espen R. Moen & �sa Rosén, 2006. "Equilibrium Incentive Contracts and Efficiency Wages," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1165-1192, December.
  24. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  25. Anderson, Patricia M & Meyer, Bruce D, 1997. "Unemployment Insurance Takeup Rates and the After-Tax Value of Benefits," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 913-37, August.
  26. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  27. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
  28. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 19-50.
  29. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  30. Hamermesh, Daniel S, 1979. "Entitlement Effects, Unemployment Insurance and Employment Decisions," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 317-32, July.
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