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Understanding the Welfare Effects of Unemployment Insurance Policy in General Equilibrium

Author

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  • Toshihiko Mukoyama

    (University of Virginia)

Abstract
This paper analyzes the welfare effects of the change in unemployment insurance benefits in three general equilibrium incomplete market models. In particular, it decomposes the total effect for each individual into different factors. In all of the models that I consider, the consumers face an uninsurable unemployment risk, can save in a interest-bearing asset, and face a borrowing constraint. I find that (i) in the models that are calibrated to the U.S. economy, the welfare benefit of having access to unemployment insurance above the current U.S. level is very limited, (ii) the changes in equilibrium prices tend to create a conflict of interest between poor and rich consumers, (iii) considering the endogenous reaction of the equilibrium unemployment rate to unemployment insurance benefit is important when considering the welfare effect of the change in equilibrium prices, and (iv) an unanticipated change in unemployment insurance benefits involves implicit transfers. Details of the model matter substantially in shaping the total welfare outcome, both through the direct effect on individuals and through the general equilibrium effect.

Suggested Citation

  • Toshihiko Mukoyama, 2010. "Understanding the Welfare Effects of Unemployment Insurance Policy in General Equilibrium," 2010 Meeting Papers 286, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:286
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    Citations

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    Cited by:

    1. Mukoyama, Toshihiko, 2021. "MIT shocks imply market incompleteness," Economics Letters, Elsevier, vol. 198(C).
    2. Chien-Chiang Lee & Tie-Ying Liu, 2017. "Insurance development, banking activities, and regional output: evidence from China," Empirical Economics, Springer, vol. 53(3), pages 1059-1081, November.
    3. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    4. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    5. Kim, Jiwoon, 2018. "The Effect of Enhancing Unemployment Benefits in Korea: Wage Replacement Rate vs. Maximum Benefit Duration," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 40(3), pages 1-44.
    6. Facundo Piguillem & Hernan Ruffo & Nicholas Trachter, 2023. "Unemployment Insurance when the Wealth Distribution Matters," Working Paper 23-08, Federal Reserve Bank of Richmond.
    7. Gustavo de Souza & Andre Luduvice, 2022. "Optimal Unemployment Insurance Requirements," Working Paper Series WP 2022-45, Federal Reserve Bank of Chicago.
    8. Per Krusell & Toshihiko Mukoyama & Richard Rogerson & Aysegul Sahin, 2020. "Gross Worker Flows and Fluctuations in the Aggregate Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 205-226, August.
    9. Mukoyama, Toshihiko, 2021. "MIT shocks imply market incompleteness," Economics Letters, Elsevier, vol. 198(C).
    10. repec:bri:uobdis:14/651 is not listed on IDEAS
    11. Mukoyama, Toshihiko, 2023. "In defense of the Kaldor-Hicks criterion," Economics Letters, Elsevier, vol. 224(C).
    12. Mukoyama, Toshihiko, 2010. "Welfare effects of unanticipated policy changes with complete asset markets," Economics Letters, Elsevier, vol. 109(2), pages 134-138, November.
    13. Etienne Lalé, 2014. "Front-loading the Payment of Unemployment Benefits," Bristol Economics Discussion Papers 15/651, School of Economics, University of Bristol, UK, revised 16 Nov 2015.
    14. Uren, Lawrence, 2018. "The redistributive role of unemployment benefits," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 236-258.
    15. Popp, Aaron, 2017. "Unemployment insurance in a three-state model of the labor market," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 142-157.
    16. Patrick J. Conway, 2022. "Unemployment insurance programs and the choice to leave the labor force," Southern Economic Journal, John Wiley & Sons, vol. 88(4), pages 1373-1400, April.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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