Two Equivalence Results between Unemployment Insurance and Wage Insurance

Anchi Xia

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Abstract: In this short note, I show that in a McCall (1970) model with risk-neutral agents, a system of wage insurance combined with unemployment insurance financed by a lump-sum tax on the employed can be replicated -- in the ex ante sense -- by a system of unemployment insurance that depends on the agent's wage when last employed and a tax that depends on the agent's wage when employed. This holds with or without endogenous search when unemployed. I also show that wage insurance is not binding until the last earned wage exceeds a threshold, which may be of independent interest.

Date: 2026-05
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