Unemployment Insurance with Endogenous Search Intensity and Precautionary Saving

Universitat Pompeu Fabra Economics WP No. 243

69 Pages Posted: 7 Jul 1998

See all articles by James S. Costain

James S. Costain

Banco de España - Research Department

Date Written: 1997

Abstract

A welfare analysis of unemployment insurance (UI) is performed in a general equilibrium job search model. Finitely lived, risk-averse workers smooth consumption over time by accumulating assets, choose search effort when unemployed, and suffer disutility from work. Firms hire workers, purchase capital, and pay taxes to finance worker benefits; their equity is the asset accumulated by workers. A matching function relates unemployment, hiring expenditure, and search effort to the formation of jobs. The model is calibrated to U.S. data; the parameters relating job search effort to the probability of job finding are chosen to match microeconomic studies of unemployment spells. Under logarithmic utility, numerical simulation shows rather small welfare gains from UI. Even without UI, workers smooth consumption effectively through asset accumulation. Greater risk aversion leads to substantially larger welfare gains from UI; however, even in this case much of its welfare impact is due not to consumption smoothing effects, but rather to decreased work disutility, or to a variety of externalities.

JEL Classification: J65, J64, J22, E21

Suggested Citation

Costain, James S., Unemployment Insurance with Endogenous Search Intensity and Precautionary Saving (1997). Universitat Pompeu Fabra Economics WP No. 243, Available at SSRN: https://ssrn.com/abstract=104948 or http://dx.doi.org/10.2139/ssrn.104948

James S. Costain (Contact Author)

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

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