The value of unemployment insurance: Liquidity vs. insurance value

Victor Hernandez Martinez and Kaixin Liu

Labour Economics, 2025, vol. 93, issue C

Abstract: This paper argues that the value of unemployment insurance (UI) can be decomposed into a liquidity component and an insurance component. While the liquidity component captures the value of relieving the cost to access liquidity during unemployment, the insurance component captures the value of protecting the worker against a potential permanent future income loss. We develop a novel, sufficient statistics method to identify the cost of accessing liquidity during unemployment, as well as the liquidity and insurance components of the value of UI. Our method requires only the labor supply responses to changes in the potential duration of UI and severance payment, and we implement it using Spanish administrative data. Our estimated monthly liquidity cost during unemployment is 1.6 percent, with important heterogeneity across groups of workers. Workers with more cash on hand have a small cost, while both wealthier and poorer workers have a similarly high cost. Shutting down the liquidity component decreases the value of UI by 76 percent. Across groups, liquidity is all that matters for wealthier workers, while the insurance channel is crucial for poorer workers. These results cannot be inferred from directly comparing the elasticity of job search to UI shocks as used by Chetty (2008). Finally, we show that while extending the potential duration of Spain’s UI would increase welfare, starting a zero-interest rate public loan program would be more welfare-improving, even under large default risks.

Keywords: Unemployment insurance; Liquidity constraints (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:93:y:2025:i:c:s0927537125000181

DOI: 10.1016/j.labeco.2025.102691

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