Ui Eligibility Rule, Moral Hazard, and Optimal Unemployment Transfer Scheme

Abstract

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.

Beyond European unemployment insurance. Less moral hazard, more moral assurance?

“…4. The employment incentives of work-related social insurance benefits are stronger than for means-tested benefits, not least due to the entitlement effect, which can completely eliminate the moral hazard problem in job searches (Zhang and Pan, 2017). 5.…”

“…wage coordination and wage restraints. The weakening of this link is likely to lead to the loss of the traditional political support of the social partners (Schelkle, 2006: 252–253). Individual and wage-related benefits can be calculated more easily, transparently and fairly than benefits that have to be means-tested; even if these benefits are flat rates (no calculation needed), the means tests afford a significant amount of administrative discretion, often leading to a high number of appeals (for the case of Germany, see Schmid, 2018: 147, 258). The employment incentives of work-related social insurance benefits are stronger than for means-tested benefits, not least due to the entitlement effect, which can completely eliminate the moral hazard problem in job searches (Zhang and Pan, 2017). The macroeconomic stabilisation impact of wage-related replacements is higher than that of (usually lower) means-tested benefits (Dolls et al, 2011).…”

Unemployment Insurance and Labor Turnover: Evidence From Brazil

“…The influence on job search effort and on reservation wages are examples of what has long dominated the literature (Fredriksson and Holmlund, 2006;Tatsiramos and van Ours, 2014;Schmieder and von Wachter, 2016). More recently, though, some papers have contributed by enlightening the effects of UI on unemployment inflow (Wang and Williamson, 2002;Light and Omori, 2004;Zhang and Faig, 2012;Fuller et al, 2015;Zhang and Pan, 2017;Zweimüller, 2018), but, to my knowledge, FSHC accumulation has not been addressed yet.…”