The Value of Unemployment Insurance: Liquidity vs. Insurance Value

Victor Hernandez Martinez and Kaixin Liu

No 22-16, Working Papers from Federal Reserve Bank of Cleveland

Abstract: This paper argues that the value of unemployment insurance (UI) can be decomposed into a liquidity component and an insurance component. While the liquidity component captures the value of relieving the cost to access liquidity during unemployment, the insurance component captures the value of protecting the worker against a potential permanent future income loss. We develop a novel sufficient statistics method to identify each component that requires only the labor supply responses to changes in the potential duration of UI and severance payment and implement it using Spanish administrative data. We find that the liquidity component represents half of the value of UI, while the insurance component captures the remaining half. However, the relevance of each component is highly heterogeneous across different groups of workers. Poorer and wealthier workers are both similarly liquidity-constrained, but poorer workers place a higher value on UI because the insurance component is significantly more important for them. On the other hand, wealthier workers and workers with more cash-on-hand value additional UI equally, but the wealthier value its liquidity, while those with more liquidity care about its insurance value. Finally, from a welfare perspective, we show that extending the potential duration of Spain’s UI would increase welfare. However, in our counterfactual case where UI is complemented with the provision of liquidity, the optimal potential duration of Spain's UI should be lower than its current level.

Keywords: Unemployment Insurance; Liquidity Constraints; Consumption Smoothing (search for similar items in EconPapers)
JEL-codes: H20 J64 J65 (search for similar items in EconPapers)
Pages: 95
Date: 2022-05-18
New Economics Papers: this item is included in nep-dge, nep-ias, nep-lab and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-202216 Full Text (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:94239

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-202216

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().