The value of unemployment insurance

Camille Landais and Johannes Spinnewijn

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Due to the absence of unemployment insurance (UI) choices, the traditional approach to estimating the value of UI is to infer it from the observed consumption response to job loss under some assumption on risk preferences. Exploiting the rich data and unique policy context in Sweden, we propose two alternative approaches that relax this assumption and we implement all three methods on the same sample of workers. The first approach considers the difference in marginal propensity to consume (MPC) when unemployed versus employed, which allows to identify the difference in prices to smooth consumption in the respective states. The second approach exploits UI choices embedded in the Swedish UI system in a Revealed Preference approach. While the drop in consumption expenditures is relatively small (∼13%), we find that the MPC is around 25% higher when unemployed than employed, translating into a marginal value of transfers that is at least 60% higher when unemployed than employed. This high value of UI is confirmed by our RP estimates and indicates substantial risk aversion given the relatively small drop in consumption expenditures.

Keywords: unemployment insurance; consumption smoothing; revealed preference; MPC (search for similar items in EconPapers)
JEL-codes: H20 J64 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2021-11-01
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Citations: View citations in EconPapers (6)

Published in Review of Economic Studies, 1, November, 2021, 88(6), pp. 3041 - 3085. ISSN: 0034-6527

Downloads: (external link)
http://eprints.lse.ac.uk/105861/ Open access version. (application/pdf)

Related works:
Journal Article: The Value of Unemployment Insurance (2021)
Working Paper: The Value of Unemployment Insurance (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:105861

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