The Role of Wealth and Participation Decisions in Designing Unemployment Insurance

Youngsoo Jang and Ji-Woong Moon
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Youngsoo Jang: Yonsei University
Ji-Woong Moon: Chung-Ang University

No 2025rwp-270, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: We examine (i) how Labor-Force Participation (LFP) margins influence unemployment through their interaction with wealth accumulation and (ii) their impact on the optimal design of unemployment insurance (UI). To this end, we construct a job search and matching model that incorporates incomplete financial markets and LFP decisions in general equilibrium. We find that LFP margins are crucial for explaining the negative relationship between unemployment and wealth observed in micro-level data. In both the model and the data, declining inflows into unemployment with wealth are the key driver of this negative relationship. Without LFP choices, however, the unemployment rate increases with wealth because inflows into unemployment do not decline with wealth, contradicting empirical findings. This disparity has significant policy implications for the design of UI: the optimal UI benefit is 75% of the current level when LFP decisions are incorporated, whereas in the model without LFP margins the optimal benefit is 0%.

Keywords: Labor Force Participation; Unemployment; Unemployment Insurance; Incomplete Markets; General Equilibrium (search for similar items in EconPapers)
JEL-codes: E24 J64 J65 (search for similar items in EconPapers)
Pages: 35pages
Date: 2025-09
New Economics Papers: this item is included in nep-dge and nep-lab
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