Paper #243

Title:

Unemployment insurance with endogenous search intensity and precautionary saving

Author:

James Costain

Date:

November 1997

Abstract:

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.

Keywords:

Unemployment insurance, matching, search effort, moral hazard, precautionary saving, prudence, life cycle

JEL codes:

J65, J64, J22, E21

Area of Research:

Macroeconomics and International Economics

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