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Unemployment insurance with endogenous search intensity and precautionary saving

  • James Costain

A welfare analysis of unemployment insurance (UI) is performed in a general equilibrium job search model. Finitely-lived, risk-averse workers smooth consumption over time by accumulating assets, choose search effort when unemployed, and suffer disutility from work. Firms hire workers, purchase capital, and pay taxes to finance worker benefits; their equity is the asset accumulated by workers. A matching function relates unemployment, hiring expenditure, and search effort to the formation of jobs. The model is calibrated to US data; the parameters relating job search effort to the probability of job finding are chosen to match microeconomic studies of unemployment spells. Under logarithmic utility, numerical simulation shows rather small welfare gains from UI. Even without UI, workers smooth consumption effectively through asset accumulation. Greater risk aversion leads to substantially larger welfare gains from UI; however, even in this case much of its welfare impact is due not to consumption smoothing effects, but rather to decreased work disutility, or to a variety of externalities.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 243.

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Date of creation: Nov 1997
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Handle: RePEc:upf:upfgen:243
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-67, June.
  2. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  3. Christopher D. Carroll & Andrew A. Samwick, 1993. "How important is precautionary saving?," Working Paper Series / Economic Activity Section 145, Board of Governors of the Federal Reserve System (U.S.).
  4. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," SSE/EFI Working Paper Series in Economics and Finance 178, Stockholm School of Economics.
  5. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  6. Dale Mortensen, 1984. "Job Search and Labor Market Analysis," Discussion Papers 594, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Silvio Rendon, 2002. "Job search and asset accumulation under borrowing constraints," Economics Working Papers 649, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Eric M. Engen & Jonathan Gruber, 1995. "Unemployment Insurance and Precautionary Saving," NBER Working Papers 5252, National Bureau of Economic Research, Inc.
  10. James S. Costain, 1998. "On the quantitative importance of wage bargaining models," Economics Working Papers 262, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Patricia M. Anderson & Bruce D. Meyer, 1994. "The Effects of Unemployment Insurance Taxes and Benefits on Layoffs Using Firm and Individual Data," NBER Working Papers 4960, National Bureau of Economic Research, Inc.
  12. Dynarski, Mark & Sheffrin, Steven M, 1987. "Consumption and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 411-28, May.
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