Working Paper: CEPR ID: DP10167
Authors: Claudio Michelacci; Hernn Ruffo
Abstract: We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers.
Keywords: insurance; search; unemployment
JEL Codes: E24; H21; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Welfare gains could be realized by redistributing unemployment benefits from older to younger workers (J68) | Increase in lifetime consumption (D15) |
| Elasticity of unemployment to benefits is larger for older workers (J65) | Increased unemployment duration (J64) |
| Moral hazard associated with unemployment insurance is significant for older workers (J65) | Increased unemployment duration (J64) |
| Moral hazard associated with unemployment insurance is mild for younger workers (J65) | Motivation to search for jobs (J68) |
| Young workers experience greater consumption losses upon unemployment (J65) | Higher marginal utility of consumption for younger individuals (D15) |
| Increasing unemployment insurance for younger workers (aged mid-twenties to early thirties) (J65) | Welfare improvements (I38) |
| Decreasing unemployment insurance for older workers (aged forties to mid-fifties) (J65) | Welfare improvements (I38) |