Optimal Unemployment Insurance and Voting

The framework of a general equilibrium heterogeneous agent model is used to study the optimal design of an unemployment insurance (UI) scheme and the voting behaviour on unemployment policy reforms. In a first step, the optimal defined benefit and defined replacement ratio UI systems are obtained in simulations. Then, the question whether switching to such an optimal system from the status quo would be approved by a majority of the voters is explored. Finally, the transitional dynamics following a policy change are analysed. Accounting for this transition has an important influence on the voting outcome.insurance, heterogeneous agents, job search, voting, human capital

Optimal Unemployment Insurance with Variable Skill Levels

I study the consequences of heterogeneity of skills for the design of an optimal unemployment insurance, using a principal-agent set-up with a risk neutral insurer and infinitely lived risk averse agents. Agents, who are characterised by different productivities or skills, are employed by firms offering wages that depend both on the agents’ individual skill level and the quality of the worker-firm-match. Agents face the risk of losing their job and, while unemployed, are offered jobs with different match qualities. No search effort by the agent is needed to receive offers. Individual productivity declines during unemployment due to depreciation of skills and increases on the job because of learning by doing. Any insurance offered must take into account the moral hazard problem created by the fact that job offers are private information to the agent. A further complication is due to the unobservability of an agent’s productivity. I find that under an optimal contract, periods of unemployment are characterised by declining benefits. Agents are further punished for long unemployment by reducing expected future utility. A new result obtained from this approach is the observation that under an efficient contract, agents whose productivity is relatively high tend to have a shorter unemployment duration and a higher productivity growth in the future. Unemployment benefits do not only depend on an agent’s employment history, but also on the skills reported by the agent. Agents are punished for accepting jobs that do not seem to be in line with their reported skills.Unemployment Insurance, Human Capital, Adverse Selection, Moral Hazard

Optimal Unemployment Insurance in a Search Model with Variable Human Capital

The framework of a general equilibrium heterogeneous agents model is used to study the optimal design of an unemployment insurance scheme and the voting behaviour on unemployment policy reforms. Agents, who have a limited lifetime and participate in the labour market until they reach the retirement age, can either be employed or unemployed in each period of their working life. Unemployed agents receive job offers of different (match) qualities. Moreover, unemployed agents suffer a decline of their individual productivity during unemployment, whereas the productivity of employed agents increases over time. Any form of unemployment insurance must take into account an important trade-off. On the one hand, generous benefits are desirable as they provide good insurance of the risk-averse agents against unforeseen income fluctuations (caused by layoffs and the randomness of individual job offers). On the other hand, high benefits induce a moral-hazard problem, as certain groups of agents choose to decline job offers that, while not being as attractive as the unemployment benefit from an individual point of view, a central planner would make them accept. An optimal unemployment insurance scheme is one that maximizes the expected lifetime utility of a newly born agent. Two types of unemployment insurance are considered, one with defined benefits and one with defined replacement ratios. A numerical version of the model is calibrated to the West German economy and simulated at ½-monthly frequency, resulting in an agent’s life-span of 1440 periods. The welfare maximising unemployment insurance scheme is determined in simulations. Under this optimal system, no payments are made to short-term unemployed agents. Long-term unemployed receive rather low (social assistance level) benefits, the optimal level of which depends on the assumed degree of risk aversion. Defined benefit systems provide a higher welfare than defined replacement ratios. I then address the question whether the majority of population would support the optimal system given the status quo. It turns out that older or unemployed agents tend vote in favour of the status quo, whereas young employed agents would approve the reform. If voters can choose between keeping their current unemployment system and jumping to the equilibrium associated with the optimal policy, there is a slight majority of just above 50% for the optimal policy. Finally, a more realistic case is considered, in which voters do not choose between the long-rung equilibria associated with policy changes, but take into account the transition process to the new equilibrium. The adjustment process of the macro environment after the policy reform is computed for a time span of sixty years. As some of the relevant variables adjust very slowly to their new long-run equilibrium values, the effect of the transition process on voting behaviour cannot be neglected

Employment Insurance and the Business Cycle

This paper quantitatively investigates the scope for improving welfare by making aspects of the unemployment insurance (UI) system depend on the state of the business cycle. A particular focus is the Canadian system of "Employment Insurance" (EI), which is designed in such a way that the generosity of benefits depends on the state of the macroeconomy. Simulations of a life-cycle model with heterogeneous agents and search frictions confirm the expectation that optimal UI systems are characterized by a substantial increase in generosity during recessions, when adverse labour market conditions reduce the importance of moral hazard while increasing the need for consumption insurance. It turns out, however, that the welfare improvements resulting from this sort of temporal differentiation of benefits are extremely small. The insurance against business cycle effects inherent in the Canadian EI system is welfare enhancing when considered in isolation; this insurance effect is, however, dominated by the welfare implications of the inter-regional redistribution effected by the system

Essays on Mechanism Design & Industrial Organization

This dissertation consists of three essays on Mechanism Design and Industrial Organization

Employment Insurance Differentiation over the Business Cycle

This paper quantitatively investigates the welfare implications of varying unemployment insurance (UI) generosity with labour market conditions, in particular over the business cycle. Using a life-cycle model with two-sided matching in the labour market, which is calibrated to match the Canadian economy, I conduct policy experiments that qualitatively confirm results from the theoretical literature that differentiation of UI generosity over the business cycle improves welfare by providing better insurance in times when labour market conditions are difficult. However, I show that quantitatively, the welfare improvements possible though optimal benefit differentiation are very small for UI systems that are reasonably efficient to start with

Unemployment Insurance Differentiation over the Business Cycle

This paper quantitatively investigates the welfare implications of varying unemployment insurance (UI) generosity with labour market conditions, in particular over the business cycle. Using a life-cycle model with two-sided matching in the labour market, which is calibrated to match the Canadian economy, I conduct policy experiments that qualitatively confirm results from the theoretical literature that differentiation of UI generosity over the business cycle improves welfare by providing better insurance in times when labour market conditions are difficult. However, I show that quantitatively, the welfare improvements possible though optimal benefit differentiation are very small for UI systems that are reasonably efficient to start with

Employment Insurance and the Business Cycle

This paper quantitatively investigates the scope for improving welfare by making aspects of the unemployment insurance (UI) system depend on the state of the business cycle. A particular focus is the Canadian system of "Employment Insurance" (EI), which is designed in such a way that the generosity of benefits depends on the state of the macroeconomy. Simulations of a life-cycle model with heterogeneous agents and search frictions confirm the expectation that optimal UI systems are characterized by a substantial increase in generosity during recessions, when adverse labour market conditions reduce the importance of moral hazard while increasing the need for consumption insurance. It turns out, however, that the welfare improvements resulting from this sort of temporal differentiation of benefits are extremely small. The insurance against business cycle effects inherent in the Canadian EI system is welfare enhancing when considered in isolation; this insurance effect is, however, dominated by the welfare implications of the inter-regional redistribution effected by the system