Unemployment Insurance Generosity and Self-Employment

Abstract

This paper examines the unintended effects of increasing unemployment insurance (UI) generosity on self-employment. Empirically, higher UI generosity strongly negatively impacts the gross flow from unemployment to self-employment, with negative elasticity twice that of the flow to employment. At the aggregate level, this increases unemployment, sharply declines self-employment, and has a positive yet non-significant effect on employment. Our quantitative model identifies two key elements driving this responsiveness: the lack of UI coverage for self-employment, creating insurance asymmetry, and the monitoring of UI applicants, discouraging alternatives to job search. Our model predicts that neutralizing these factors implies significant reallocations across occupations.

Keywords: Self-employment, Unemployment Insurance, Labor Market Mobility, Monitoring

JEL Classification: E24, E61, J62