Front-Loading the Payment of Unemployment Benefits
40 Pages Posted: 7 Dec 2014 Last revised: 17 Nov 2015
Date Written: February 1, 2015
We study the effects of front-loading the payment of unemployment benefits in an equilibrium matching framework with precautionary savings. Front-loading the benefit system trades off fewer means to smooth consumption at long unemployment durations for improved insurance upon job loss. In the United States where jobless spells are typically frequent but short, we find that front-loading the benefit system yields significant welfare gains for new benefit recipients. The gains are lower in the aggregate, but are not completely offset by general equilibrium effects. Comparison with a search effort model shows that the welfare figures are not specific to matching frictions.
Keywords: Unemployment Insurance, Precautionary Savings, Labor-Market Frictions, Welfare Effect
JEL Classification: E21, I38, J63, J65
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