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The Role of Wealth and Participation Decisions in Designing Unemployment Insurance

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  • Youngsoo Jang

    (Yonsei University)

  • Ji-Woong Moon

    (Chung-Ang University)

Abstract

We examine (i) how Labor-Force Participation (LFP) margins influence unemployment through their interaction with wealth accumulation and (ii) their impact on the optimal design of unemployment insurance (UI). To this end, we construct a job search and matching model that incorporates incomplete financial markets and LFP decisions in general equilibrium. We find that LFP margins are crucial for explaining the negative relationship between unemployment and wealth observed in micro-level data. In both the model and the data, declining inflows into unemployment with wealth are the key driver of this negative relationship. Without LFP choices, however, the unemployment rate increases with wealth because inflows into unemployment do not decline with wealth, contradicting empirical findings. This disparity has significant policy implications for the design of UI: the optimal UI benefit is 75% of the current level when LFP decisions are incorporated, whereas in the model without LFP margins the optimal benefit is 0%.

Suggested Citation

  • Youngsoo Jang & Ji-Woong Moon, 2025. "The Role of Wealth and Participation Decisions in Designing Unemployment Insurance," Working papers 2025rwp-270, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2025rwp-270
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    References listed on IDEAS

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    1. Kalai, Ehud, 1977. "Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons," Econometrica, Econometric Society, vol. 45(7), pages 1623-1630, October.
    2. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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