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Designing a good unemployment insurance scheme is a delicate matter. In a system with no or little insurance, households may be subject to a high income risk, whereas excessively generous unemployment insurance systems are known to lead to high unemployment rates and are costly both from a fiscal perspective and for society as a whole. Andreas Pollak investigates what an optimal unemployment insurance system would look like, i.e. a system that constitutes the best possible compromise between income security and incentives to work. Using theoretical economic models and complex numerical simulations, he studies the effects of benefit levels and payment durations on unemployment and welfare. As the models allow for considerable heterogeneity of households, including a history-dependent labor productivity, it is possible to analyze how certain policies affect individuals in a specific age, wealth or skill group. The most important aspect of an unemployment insurance system turns out to be the benefits paid to the long-term unemployed. If this parameter is chosen too high, a large number of households may get caught in a long spell of unemployment with little chance of finding work again. Based on the predictions in these models, the so-called "Hartz IV" labor market reform recently adopted in Germany should have highly favorable effects on the unemployment rates and welfare in the long run.
Social insurances are an important component of welfare states in developed countries.They have been set up to meet the twofold objective of improving efficiency, in acontext where information is not available to all parties, and enhancing equity bysharing the cost of insurance across risk types. If this general principle achievesconsensus, the question of the optimal level of insurance that should be providedis at the centre of the policy and scientific debate. This dissertation addresses theissue of the optimal design of unemployment insurance (UI), taking into account howUI parameters can affect the behaviour of firms and workers either before, duringor after unemployment. It contributes to the literature in three ways: (i) it drawsthe attention on the interaction between UI design and on-the-job behaviours wherethe focus has mainly been on the response of job-seekers to UI parameters duringunemployment; (ii) using rich administrative data, it empirically reveals the existenceand potential costs of such behavioural responses; (iii) it tests the empirical validityof theoretical arguments usually put forward as a motivation for public interventionin the UI market, namely adverse selection and individual optimisation failures.Chapter 1 assesses the effect of a UI program letting some job-seekers choosebetween low benefits for a long duration or higher benefits for a shorter duration. Iuse this uncommon choice feature in nationally-mandated UI schemes to understandthe determinants of the choice and its consequences. Using a rich set of covariates, Idocument the existence of adverse selection, and relate the choice of the high-benefitoption to observable characteristics generally associated to a lower risk-aversion or ahigher impatience. My results also reveal a high moral hazard cost, as job-seekersopting for higher benefits are predicted to stay unemployed longer. This negativeimpact that is even higher for job-seekers with a high initial unemployment risk.Chapter 2 shows that a discontinuous increase in the level of UI benefits at atenure threshold leads to the strategic scheduling of layoffs in order to maximise thesurplus from separation. I use the bunching methodology to quantify the extensionof the employment spell in response to the increase in UI benefits. Results suggestthat this extension is the result of an individual bargaining process between theworker and the employer. I argue that workers trade higher UI benefits against areduction in the cost or the risk associated to the layoff, through a lower probabilityto claim damages, lower severance payment or a lower reputational cost. Chapter 3 analyses the effect of the UI eligibility criteria imposing a minimumemployment record to claim benefits on pre and post-unemployment outcomes. Ithighlights a separation response through a jump in employment outflows at theeligibility threshold. Exploiting a reform that reduced the minimum employmentrecord, we show that, in some sectors, this separation response translates into ahigher number of contracts whose duration exactly coincides with the new workhistory condition. This suggests that, in some sectors, the change in the UI eligibilitycriteria contributed to shape a new norm regarding the duration of short contracts.It would imply that UI parameters do not only affect the outcomes of job-seekersbefore, during and after unemployment, but also the outcomes of workers who donot experience unemployment. The last part of the chapter evaluates the extensivemargin effect of UI benefits. Receiving UI benefits as opposed to not receiving anybenefit at all has a negative impact on future employment probability, that does notseem to be compensated by an improvement in terms of job quality.
This book examines unemployment insurance policy through a survey, taking stock of the theoretical work in the field of labor economics. It closely follows and assesses developments in the modelling of optimal unemployment insurance (UI) policies, beginning with the initial analytical findings produced in the second half of the 1970s. A main part of the survey is devoted to the two basic strands of analysis about, respectively, the optimal level of UI benefits and the optimal time profile of UI policy. The book has two different objectives. The first is to provide an essential summary of the individual models, with the intention of underscoring how a number of specific messages for the policy-maker can be derived from analytical constructions. It further emphasizes and comments on what the models deliver to UI policy-makers. The second objective is to stress the importance and extension of open questions in the field of the theoretical approach to the unemployment insurance issue. The survey discusses the multiplicity of heterogeneities of the labor world in particular as relevant for UI issues on the one side, and on the other hand, the independence of the two basic choices of UI policy, its meaning and its limits, and the possible forms of complementarity between these choices. The book is a must-read for researchers, students, and policy-makers interested in a better understanding of the field of labor economics in general, as well as unemployment insurance policies in particular.
Much of the policy discussion of labor market institutions has been at the margin, with proposals to tighten unemployment benefits, reduce employment protection, and so on. There has been little discussion however of what the ultimate goal and architecture should be. The paper focuses on characterizing this ultimate goal, the optimal architecture of labor market institutions. We start our analysis with a simple benchmark, with risk averse workers, risk neutral firms and random shocks to productivity. In this benchmark, we show that optimality requires both unemployment insurance and employment protection--in the form of layoff taxes; it also requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and heterogeneity of firms or workers. We show how the architecture must be modified in each case. The scope for insurance may be more limited than in the benchmark; so may the scope for employment protection. The general principle remains however, namely the need to look at unemployment insurance and employment protection together, rather than in isolation.
Much of the policy discussion of labor market institutions has been at the margin, with proposals to tighten unemployment benefits, reduce employment protection, and so on. There has been little discussion however of what the ultimate goal and architecture should be. The paper focuses on characterizing this ultimate goal, the optimal architecture of labor market institutions. We start our analysis with a simple benchmark, with risk-averse workers, risk-neutral firms and random shocks to productivity. In this benchmark, we show that optimality requires both unemployment insurance and employment protection - in the form of layoff taxes; it also requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and heterogeneity of firms or workers. We show how the architecture must be modified in each case. The scope for insurance may be more limited than in the benchmark; so may the scope for employment protection. The general principle remains however, namely the need to look at unemployment insurance and employment protection together, rather than in isolation. Keywords: Unemployment insurance, employment protection, unemployment benefits, layoff taxes, layoffs, severance payments. JEL Classifications: D60, E62, H21, J30, J32, J38, J65.
Biased perceptions of risks change the perceived value of insurance and the perceived returns to avoiding these risks. I show empirically that unemployed workers overestimate how quickly they will find work, but underestimate the return to their search efforts. I analyze the consequences for the optimal design of unemployment insurance. With biased beliefs, contracts equalizing the marginal smoothing benefit and the moral hazard cost of insurance are suboptimal. Social and private insurance diverge; a paternalistic social planner corrects the moral hazard cost for the distortion in the insured's effort choice, while private insurers focus on the perceived rather than the true smoothing benefits. When unemployed workers are optimistic, privatizing unemployment insurance may result in inefficiently low or rapidly decreasing unemployment benefits.
This study explores the prospect of the application of the basic principles of ICL into many other potential areas of social and economic policy. Using case studies it evaluates previously implemented ICL schemes where interest rate subsidies are usually the norm, and questions the merits of this approach.
We study the optimal design of unemployment insurance for workers sampling job opportunities over time. We focus on the timing of benefits and the desirability of allowing workers to freely access a riskless asset. When workers have constant absolute risk aversion preferences, a very simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to savings using the riskless asset. Away from this benchmark, for constant relative risk aversion preferences, the optimal policy involves nearly constant benefits and the welfare gains from more elaborate policies are minuscule. Our results highlight two distinct roles for policy toward the unemployed: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies that serve as insurance against the uncertain duration of unemployment spells