Should Unemployment Insurance Be Asset-Tested?

Abstract

A series of empirical studies has documented that job search behavior depends on the financial situation of the unemployed. Starting from this observation, we ask how unemployment insurance policy should take the individual financial situation into account. We use a quantitative model with a realistically calibrated unemployment insurance system, individual consumption-saving decision and moral hazard during job search to answer this question. We find that the optimal policy provides unemployment benefits that increase with individual assets. By implicitly raising interest rates, asset-increasing benefits encourage self-insurance, which facilitates consumption smoothing during unemployment but does not exacerbate moral hazard for job search. Asset-increasing benefits also have desirable properties from a dynamic perspective, because they emulate key features of the dynamics of constrained efficient allocations. We find welfare gains from introducing asset-increasing benefits that are substantial and amount to 1.5% of consumption when comparing steady states and 0.8% of consumption when taking transition costs into account. More generous replacement rates or benefits targeted to asset-poor households, by contrast, have a negative effect on welfare. JEL: E21, H21, J65

Can the Unemployed Borrow? Implications for Public Insurance

“…Our paper is also related to studies which integrate unemployment insurance into Bewley-Huggett-Aiyagari frameworks (e.g. Lentz and Tranaes [2001], Krusell, Mukoyama, and Şahin [2010], Nakajima [2012a], and Nakajima [2012b]) as well as studies of optimal unemployment insurance with assets (inter alia Shimer and Werning [2005], Chetty [2008], Lentz [2009], Koehne and Kuhn [2015] and Chaumont and Shi [2017]). 2 Closely related papers by Shimer and Werning [2005] and Lentz [2009] compute optimal UI in models with savings.…”

Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity

“…Finally, our work has implications for the large strand of literature that studies positive and normative questions pertaining to UI under the presence of incomplete markets without aggregate risk (Hansen and Imrohoroglu 1992;Shimer and Werning 2008;Koehne and Kuhn 2015;Kroft and Notowidigdo 2016;Kekre 2019;Braxton, Herkenhoff, and Phillips 2020;Birinci, Karahan, Mercan, and See 2021) or with aggregate risk (Jung and Kuester 2015;Mitman and Rabinovich 2015;McKay and Reis 2016;Landais, Michaillat, and Saez 2018;Birinci 2019;McKay and Reis 2020;Pei and Xie 2020). 3 Relative to these papers, our model focuses on the role of cross-sectional heterogeneity in determining the magnitudes of labor market responses to UI changes.…”

The welfare effects of asset mean‐testing income support

“…33 Job search is exogenous in the model. Koehne and Kuhn (2015) study the incentives for job search when unemployment benefits depend on the level of assets. …”

“…Most literature studying the employment effects of means-tested programs focus on the size of their benefits. Recent examples include Low, Meghir, and Pistaferri (2010), Chan (2013),Blundell, Dias, Meghir, and Shaw (2016), andOrtigueira and Siassi (2017).3 Job search is exogenous in the model Koehne and Kuhn (2015). study the incentives for job search when unemployment benefits depend on the level of assets.…”