Duration‐Dependent Unemployment Insurance Payments and Equilibrium Unemployment

Abstract

This paper develops a model of equilibrium unemployment with duration-dependent unemployment insurance (UI) payments. As the government does not observe job offers, there is a moral hazard problem because the option of receiving further UI payments raises the job-seeker's value of remaining unemployment. Extending the duration of UI payments while reducing the level of payments, to hold total generosity constant, results in higher negotiated wages. Simulations suggest that a generosity neutral switch from a six-month UI scheme to a one-year scheme has small effects, but a switch to an indefinite scheme has a large impact on wages and unemployment.

Search-Theoretic Models of the Labor Market-A Survey

“…By lowering their standards they reduce the fraction of low productivity types in the pool, and we are back to where we started. 45 See also Acemoglu (1996), Burdett-Smith (2001), , and LaingPalivos-Wang (1995,2003) for other models with human capital. tive since productivity is the same.…”

“…We can now solve for y R and α w from (44) and (45). The first of these equations describes an increasing relationship between α w and y R (when it is easier for a worker to find a job, he is more willing to turn down a potential match with low productivity).…”

“…For example, an increase in b shifts (44) but not (45), resulting in an increase in y R , a reduction in α w , and a reduction in H = α w [1 − F (y R )]. From a worker's perspective, things here closely resemble the single-agent problem, in the sense that he receives offers at rate α w from a given distribution and needs to decide which ones to accept, although of course here the wage distribution and arrival rate are endogenous.…”

Re-entitlement effects with duration-dependent unemployment insurance in a stochastic matching equilibrium

“…In fact Coles and Masters (2004) establish that if one equilibrium exists, then generically there are two. That paper identifies such equilibria by first fixing an arbitrary value for t and solving for steady-state labour market tightness, denoted y n ðtÞ, and unemployment level U n ðtÞ.…”

“…approach -they assume union wage bargaining where wages are negotiated by insiders (whose threatpoint is the value of being laid-off) and new employees (outsiders) must be hired at the union wage. Masters (2004, 2006) instead assume hiring wages are determined by strategic bargaining between the hiring firm and the unemployed worker and so depend on the worker's remaining entitlement to further UI. The bargaining approach used here is closely related.…”