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This paper derives the optimal unemployment insurance (UI) transfer scheme, UI benefits, and UI contribution fees: When a worker has to earn his or her UI eligibility through work, the UI benefits do not last forever, and the UI agency has imperfect monitoring power on the strategic behavior of the worker. We show that the consideration of the UI eligibility rule generates the effective entitlement effect, which serves as an additional incentive device and alters the nature of the optimal UI transfer scheme established in literature. In contrast with previous studies, we find that when the effective entitlement effect is large, it completely removes the moral hazards in job searches, job acceptances, and job quits. As a result, the optimal UI benefits and contribution fees become constant. Calibrated to the data in the United States, the model reproduces some key features of the existing UI system.

Current Population Survey (CPS) data over the period from 1994 to 2008 show that inflation has a positive effect on the residual wage dispersion. To explain this phenomenon, we introduce uncoordinated job searches into a general equilibrium monetary search framework. Our model shows that the uncoordinated job searches by unemployed workers give rise to an equilibrium, where a firm is matched with zero, one, or multiple job applicants. The ex post difference in matching probabilities generates a two-point wage dispersion among identical workers, when the Mortensen rule is implemented in the wage-determination process. In our model, inflation positively influences the wage dispersion directly through its impact on firm's real profit and indirectly through the effect of inflation that spills over from the goods market to the labor market. With reasonable parameter values, the calibrated model can account for most of the observed responses of residual wage dispersion to inflation.

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