Unemployment Insurance and Experience Rating: Insurance Versus Efficiency

17 Pages Posted: 8 Nov 2005

See all articles by Steeve Mongrain

Steeve Mongrain

Simon Fraser University (SFU) - Department of Economics

Joanne Roberts

University of Toronto - Department of Economics

Multiple version iconThere are 2 versions of this paper

Abstract

Unemployment insurance (UI) distorts firms' layoff decisions by reducing the cost of laying off workers. To dampen this increase, it has been suggested that UI should be financed with an experience-rated tax. Despite the fact that increasing the level of experience rating can reduce unemployment, it can reduce the insurance coverage workers receive. With high experience rating, firms may reduce their severance payments by more than the UI benefit. We build a model where competitive firms offer contracts with severance payments to risk-averse workers. Frictions in the labor market lead to incomplete insurance. This article shows that less than full-experience rating enables the government to increase the insurance coverage workers receive. Welfare implications are also investigated.

Suggested Citation

Mongrain, Steeve and Roberts, Joanne, Unemployment Insurance and Experience Rating: Insurance Versus Efficiency. International Economic Review, Vol. 46, No. 4, pp. 1303-1319, November 2005. Available at SSRN: https://ssrn.com/abstract=825180

Steeve Mongrain (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3547 (Phone)
604-291-5944 (Fax)

HOME PAGE: http://www.sfu.ca/~mongrain/

Joanne Roberts

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada

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