Worker Heterogeneity and Optimal Unemployment Insurance: The Surprising Power of the Floor

Simon J. Heiler ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Incentives to search for employment vary systematically with age and idiosyncratic labor productivity. These variations should be accounted for when designing UI policy, yet conditioning on related factors can be difficult or infeasible in practice. Using a life cycle model with endogenous human capital accumulation, idiosyncratic labor risk, and permanent differences in worker productivity, I analyze optimal UI policies. I find that for the U.S. an age-and-type-dependent policy generates welfare gains equal to 0.3 percentage points of consumption in all states and periods relative to a constant a replacement rate. Moreover, I demonstrate that about 80% of the gains from conditioning replacement rates on age only and about 60% of the welfare gains from conditioning on age and productivity can be generated by the current U.S. UI system. This can be achieved by substantially raising the benefit floor, a feature of the U.S. UI system that is largely ineffective in its current implementation.

Keywords: Unemployment Insurance; Worker Heterogeneity; Lifecycle (search for similar items in EconPapers)
JEL-codes: E24 J65 (search for similar items in EconPapers)
Pages: 48
Date: 2024-05
New Economics Papers: this item is included in nep-dge and nep-lab
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