The Implications of Labor Market Heterogeneity on Unemployment Insurance Design

We digitize state-level and time-varying unemployment insurance (UI) laws on eligibility, payment amount, and payment duration and combine them with microdata to estimate UI eligibility, take-up, and replacement rates at the individual level. We document how income and wealth levels affect unemployment risk, eligibility, take-up, and replacement rates over the course of unemployment. We evaluate whether these findings are important for shaping UI policy design using a general-equilibrium incomplete-markets model with a frictional labor market that matches our empirical findings. We show that a nested model that fails to match these findings yields a substantially less generous optimal UI policy.