EFFICIENT UNEMPLOYMENT INSURANCE: Conclusion


This paper has constructed a general equilibrium model of search with risk-aversion. An increase in risk-aversion induces workers to seek lower wage jobs with less unemployment risk. Firms cater to these preferences by creating jobs with lower wages and lower capital intensity. UI has the reverse effects due to market generated moral hazard: insured workers want to seek riskier jobs and the market once again caters to these preferences by creating the desired jobs, so UI increases wages and reduces employment. cash-loans-for-you.com

Our framework, however, also points to a novel effect of UI on productivity. The conventional wisdom emphasizes the trade-off between output and the risk-sharing provided by UI. We show that general equilibrium interactions in the labor market can reverse this wisdom. UI induces firms to invest more in capital, and in moderation, raises output. Because the distortion in the production side of the economy is due to incomplete insurance and risk-aversion, UI is precisely the right tool to deal with this market failure. In fact, we establish that, despite the potential non-convexities in the economy, there exists a level of UI which restores output to its maximum level. It is useful to reiterate that despite the beneficial effects of UI, our model does not make clear policy recommendations because it does not explain why the private sector cannot offer UI. One can argue that adverse selection as in Rothschild and Stiglitz (1976) might prevent this, but more analysis would be required to reach a definite conclusion.
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EFFICIENT UNEMPLOYMENT INSURANCE: Evidence and Extensions 3

Our stylized model assumes that when workers find unemployment risk more costly, firms accept additional vacancy risk and therefore reduce their ex ante capital investments. In practice, firms do maintain vacancies for long periods of time (e.g. Myers and Creamer, 1967). However, the reason is typically not that they are unable to locate a worker, but because they are unable to locate a satisfactory worker. For example, using Dutch data, van Ours and Ridder (1993) estimate that receiving applications takes about three weeks on average, but selecting the qualified applicant from among those takes on average fifteen weeks.

A firm may have some latitude in choosing the specificity of its investment. For example, it can design a secretarial job which most workers with a high school diploma could fill, or it can open a higher productivity job with more specific requirements, such as familiarity with a range of software, experience in the same line of business, and so on, which would be harder to fill. In this environment, if workers wish to avoid unemployment, firms will accommodate them by making less specific investments.
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EFFICIENT UNEMPLOYMENT INSURANCE: Evidence and Extensions 2


Acemoglu then investigates how legislated changes in state level replacement ratios for low wage workers, between 1983 and 1993, affect the industrial and occupational composition of jobs among noncollege graduates. Controlling for state and time effects, he finds that a state that increases its replacement ratio experiences an increase in the unemployment rate, but also a relative increase in the number of workers in high wage occupations and industries, and both higher labor productivity and higher labor productivity growth. In the case of industries, this is only caused by a larger decline in the employment of low wage industries than high wage industries. In the case of occupations, the results are stronger — there is actually an increase in the number of high wage jobs, despite the decline in overall employment. For example, a 10 percentage point increase in the replacement ratio increases the number of high wage jobs by 1.3%, suggesting that UI may have an important effect on the types of jobs that are created.
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EFFICIENT UNEMPLOYMENT INSURANCE: Evidence and Extensions

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Table 2 shows the equilibrium of the model in this case. For low levels of risk-aversion, the output-maximizing level of UI is significantly lower. Indeed, for risk-neutral workers, the output-maximizing level of UI is typically negative, as noted above. Similarly, when the coefficient of absolute risk aversion is 10, accounting for conventional moral hazard reduces the output maximizing level of UI by a factor of 8, from 0.088 to 0.011. But, for higher levels of risk-aversion, moral hazard has little effect on the output-maximizing UI. This is despite the fact that the reduction in search effort raises the unemployment rate significantly. For example, when the coefficient of absolute risk aversion is 40, with no UI the unemployment rate is 5.6%. With efficient UI and no conventional moral hazard, the unemployment rate rises to 7.2% (the risk-neutral level). Conventional moral hazard raises the output-maximizing unemployment rate by another fifty percent, to 10.8%, nearly double the level with no UI. Still, (market) output is about 30% higher than without any UI. Since our measure of output excludes the value of home-production, this exaggerates the cost of nonparticipation, making our estimates conservative. speedy-payday-loans.com
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EFFICIENT UNEMPLOYMENT INSURANCE: A Dynamic Model Without Wealth Effects 6

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The proof is in Appendix В and the intuition is exactly the same as Proposition 6. In the risk-neutral limit (9 = 0), ze = re = 0, but when agents are risk-averse, efficient UI is strictly positive.
To get a sense of the importance of the effects highlighted in this model, we undertake a simple calibrations exercise. We take a period to be a year and set the discount factor to p = 1/R = 0.94, while the birth rate is 5 = 0.01. The production function is f(k) = 10fc°-5. We set r}(q) = 1 — e-0*159, which implies that unemployed workers are hired with probability less than 0.15 per year. Although such low job finding probabilities do not fit the data, this is the only way to generate reasonable unemployment rates in a model without any job destruction. Finally, we consider values of the coefficient of absolute risk aversion ranging from 0 to 100. These correspond to coefficients of relative risk aversion for unemployed workers with no assets and no UI between 0 and 2.5. Wanna see a fast easy payday loan that can actually boost your credit score? Use our services by applying for one here website and you will see it happen. Consolidate your debt or pay off credit cards using a loan from us and get points improving your credit score, now isn’t that a dream come true?

Table 1 shows the results. An increase in the coefficient of absolute risk aversion from 0 to 10 has little effect on output, because the changes in the equilibrium allocation, as compared with the risk-neutral case, are in the neighborhood of the output-maximizing allocation. However, when risk-aversion is higher, the loss in output associated with lack of insurance is much larger. It increases from 7% when 9 = 20 to 27% when 9 = 40, and to 60% when 9 — 100. The last row gives the level of efficient UI, which increases the level of output back to the risk-neutral level, 0.158. In this calibrated economy the introduction of UI can increase the level of output by up to 250%.
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EFFICIENT UNEMPLOYMENT INSURANCE: A Dynamic Model Without Wealth Effects 5


To understand the second part of the proposition, notice from Lemma 1 that asset levels do not affect the comparison of expected utilities of searching and nonpaxticipating workers. Therefore, there will exist a cutoff level of outside productivity, x such that all workers with higher outside productivity do not participate. This is in turn given by setting the utility of an unemployed participating worker, U(A), equal to the utility of the marginal nonparticipant N(A, x + z), which implies x = ф. The proof of the third part of the Proposition is available on request. Note that the uniqueness of ф* does not guarantee the uniqueness of equilibrium investments, wages, and queue lengths. It simply states that all equilibria give a common level of utility to participating workers.
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