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Worker selectivity and fiscal externalities from unemployment insurance

Benjamin Griffy and Stanislav Rabinovich

European Economic Review, 2023, vol. 156, issue C

Abstract: A robust prediction of job search models is that unemployment insurance (UI) makes workers more selective about which jobs they accept, thereby raising average accepted wages and thus generating a positive fiscal externality. We provide a sufficient-statistics formula for evaluating the size of this selectivity effect and argue theoretically that it is likely to be small. In a standard sequential search model, the effect of UI on wages is linked to its effect on the job-finding hazard; the slope of the relationship between these elasticities depends on a small number of estimable statistics, key among them observed worker flows. Plausible calibrations of the model imply that the magnitude of the wage elasticity is small relative to the job-finding elasticity. Although ignoring the wage effect of UI would over-estimate its fiscal cost and under-estimate its welfare benefit, the model-implied formula predicts the magnitude of this bias to be small.

Keywords: Labor market; Search frictions; Unemployment insurance (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:156:y:2023:i:c:s0014292123000995

DOI: 10.1016/j.euroecorev.2023.104470

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