Unemployment insurance only for the rich

Designing an unemployment insurance system is tricky, because you want to discourage shirkers (cheaters who refuse job offers or search too little, yet get benefits) while still providing well-being enhancing insurance. There is a big literature on this, with now a new paper with a rather odd result.

Sebastian Koehne and Moritz Kuhn look at an economy where households cannot borrow, but can accumulate assets. People who save well ahead do not need to be that much insured, so the moral hazard of shirking should not be that important. Also, you want more savings to generate more capital in the economy. The results is that unemployment insurance benefits should rise with wealth, as they implicitly increase the return on assets. But this also increases the unemployment rate. I suspect it is the rich who are now shirking in larger numbers, and as they are rich, the results loss in consumption does not matter much for welfare, as the have a lower marginal utility of consumption. I am still surprised, though, that a one percentage point increase in the average unemployment rate can increase welfare. Maybe it has to do with the assumption that UI benefits in the US average at 50%, which may be true for those who are eligible, but is much lower when you factor in those not eligible.

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