Template-Type: ReDIF-Paper 1.0
Title: Worker Heterogeneity and Optimal Unemployment Insurance: The Surprising Power of the Floor
Author-Name: Simon J. Heiler
Author-Email: simon.heiler@uni-bonn.de

Classification-JEL: J65, E24
Keywords: Unemployment Insurance, Worker Heterogeneity, Lifecycle

Abstract: Incentives to search for employment vary systematically with age and idiosyncratic labor productivity. These
variations should be accounted for when designing UI policy, yet conditioning on related factors can be difficult
or infeasible in practice. Using a life cycle model with endogenous human capital accumulation, idiosyncratic
labor risk, and permanent differences in worker productivity, I analyze optimal UI policies. I find that for the U.S.
an age-and-type-dependent policy generates welfare gains equal to 0.3 percentage points of consumption in all
states and periods relative to a constant a replacement rate. Moreover, I demonstrate that about 80% of the
gains from conditioning replacement rates on age only and about 60% of the welfare gains from conditioning on
age and productivity can be generated by the current U.S. UI system. This can be achieved by substantially
raising the benefit floor, a feature of the U.S. UI system that is largely ineffective in its current implementation.

Note: 
Length: 48
Creation-Date: 2024-05
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp545
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_545