On the Provision of Unemployment Insurance when Workers are Ex-ante Heterogeneous

Avihai Lifschitz, Ofer Setty and Yaniv Yedid-Levi
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Avihai Lifschitz: Tel Aviv University

No 391, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Labor market outcomes demonstrate considerable variation between and within skill groups. We construct a general equilibrium model with incomplete markets and exogenous differences that matches these facts. We study the role of exogenous heterogeneity in choosing the optimal re- placement rate and the maximum benefit for an unemployment insurance (UI) system. The optimal average replacement rate is 54%, compared to 10% in a model without the features of exogenous heterogeneity. The relatively generous choice in our model is due to the redistributive role of UI – a manifestation of two elements. First, workers who are unemployed more often receive positive net transfers from the UI system because they draw resources more frequently. Second, the existence of a cap makes UI benefits progressive. Our main result holds even in the presence of a generous progressive taxation system.

Date: 2019
New Economics Papers: this item is included in nep-dge, nep-ias and nep-pbe
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Citations: View citations in EconPapers (2)

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Journal Article: On the Provision of Unemployment Insurance when Workers are Ex-Ante Heterogeneous (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:391

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