Worker Selectivity and Fiscal Externalities from Unemployment Insurance
25 Pages Posted: 12 Mar 2022 Last revised: 11 Aug 2022
Date Written: January 19, 2022
A robust prediction of job search models is that unemployment insurance (UI) makes workers more selective about which jobs they accept, thereby raising average accepted wages. We provide a sufficient-statistics formula for evaluating the size of this selectivity effect and argue theoretically that it is likely to be small. In a standard sequential search model, the effect of UI on wages is linked to its effect on the job-finding hazard; the slope of the relationship between these elasticities depends on a small number of estimable statistics, key among them observed worker flows. Plausible calibrations of the model imply that the magnitude of the wage elasticity is small relative to the job-finding elasticity. Although ignoring the wage effect of UI would over-estimate its fiscal cost and under-estimate its welfare benefit, the model-implied formula predicts the magnitude of this bias to be small.
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