On the Provision of Insurance Against Search-Induced Wage Fluctuations

Jean-Baptiste Michau

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Abstract: This paper investigates the provision of insurance to workers against search-induced wage fluctuations. I rely on numerical simulations of a model of on-the-job search and precautionary savings. The model is calibrated to low skilled workers in the U.S.. The extent of insurance is determined by the degree of progressivity of a non-linear transfer schedule. The fundamental trade-off is that a more generous provision of insurance reduces incentives to search for better paying jobs, which is detrimental to the production efficiency of the economy. I show that progressivity raises the search intensity of unemployed worker, which reduces the equilibrium rate of unemployment, but lowers the search intensity of employed job seekers, which results in a lower output level. I also solve numerically for the optimal non-linear transfer schedule. The optimal policy is to provide almost no insurance up to a monthly income level of $1450, such as to preserve incentives to move up the wage ladder, and full insurance above $1650. This policy halves the standard deviation of labor incomes, increases output by 2.4% and generates a consumption-equivalent welfare gain of 1.3%. Forbidding private savings does not fundamentally change the shape of the optimal transfer function, but tilts the optimal policy towards more insurance at the expense of production efficiency.

Keywords: Moral hazard on the job; Optimal social insurance; Progressivity; Search frictions (search for similar items in EconPapers)
Date: 2013-08-07
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ias, nep-lab and nep-spo
Note: View the original document on HAL open archive server: https://hal.science/hal-00850547
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: On the Provision of Insurance against Search‐Induced Wage Fluctuations (2021)
Working Paper: On the Provision of Insurance Against Search-Induced Wage Fluctuations (2014)
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