Working Paper: CEPR ID: DP6364
Authors: John Hassler; Jos Vicente Rodriguez Mora
Abstract: Evidence suggests that unemployed individuals can sometimes affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex-ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. In particular, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment benefits should increase over the unemployment spell, with an initial period with low benefits and an increase after this period has expired.
Keywords: adverse selection; moral hazard; search; unemployment benefits
JEL Codes: E24; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unemployment benefits should increase over the duration of unemployment (J65) | Incentives to engage in moving or retraining (J62) |
| Failure to provide adequate incentives for moving or retraining (J68) | Reduced geographical mobility (J62) |
| Failure to provide adequate incentives for moving or retraining (J68) | Higher aggregate unemployment rates (E24) |
| Generosity of unemployment insurance (J65) | Geographical mobility rates (J62) |
| Optimal design of unemployment insurance should account for dynamics (J65) | Avoid suboptimal outcomes in labor market participation and mobility (J68) |