Working Paper: CEPR ID: DP18526
Authors: Zhifeng Cai; Jonathan Heathcote
Abstract: How generous should social insurance be when quits account for a large share of transitions into non-employment? We address this question using a multi-sector directed search model extended to incorporate endogenous quits both to other jobs and to non-employment. Workers quit too often in the competitive equilibrium, and private markets co-ordinate on excessively high “efficiency” wages. Quantitatively, we find that unemployment insurance is optimally much less generous in an economy with quits than in one without. An extended Baily-Chetty formula is derived to illustrate the source of this difference.
Keywords: unemployment insurance; quits; directed search
JEL Codes: E24; J31; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of quits (J63) | optimal UI replacement rate (J65) |
| excessive quitting (J63) | depressed wages for all workers (J39) |
| ability to distinguish between quitters and those laid off (J63) | optimal transfer for quitters (F16) |
| optimal policy addressing inefficiency (H21) | discouragement of excessive quitting (J63) |