The Value of Unemployment Insurance
70 Pages Posted: 1 Apr 2019 Last revised: 8 Apr 2019
Date Written: March 2019
In the absence of unemployment insurance (UI) choices, the standard approach to estimating the value of UI is to infer it from the observed consumption response to job loss in combination with some assumption on preferences. Exploiting the unique data and policy context in Sweden, we propose two alternative approaches, which we implement and compare to the standard consumption-based approach on the exact same sample of workers. Our empirical analysis reveals that the drop in consumption expenditures upon job loss is relatively small (~ 13 percent), but that the marginal propensity to consume (MPC), estimated using variation in local government transfers, is 30 - 40 percent higher when unemployed than when employed. This wedge in MPCs, the focus of our first approach, reveals a high relative price of smoothing consumption, which confirms direct evidence on the limited consumption smoothing means available during unemployment. The estimated relative price provides a lower-bound on the value of UI, which turns out to be substantially higher than the consumption-based estimate under standard preference assumptions. Exploiting the UI choices embedded in the Swedish UI system, we also propose a Revealed-Preference approach, which confirms that the average value of UI is large in our setting, but also reveals substantial dispersion in the value of UI, above and beyond the variation in consumption drops.
Keywords: Consumption Smoothing, MPC, Revealed Preference, Unemployment insurance
JEL Classification: H20, J64
Suggested Citation: Suggested Citation