A Context-Robust Measure of the Disincentive Cost of Unemployment Insurance
Johannes F. Schmieder, Till von Wachter
American Economic Review · 2017 · Volume 107 · Issue 5
Abstract
This paper proposes a new measure of the disincentive cost of unemployment insurance (UI): the ratio of the behavioral cost (BC) to the mechanical cost (MC) of a UI reform. This measure represents the labor supply distortion relative to the additional (mechanical) transfer from the UI reform. We show the BC/MC ratio naturally arises from a model of optimal UI and can be readily computed and compared across different types of reforms and labor market contexts. We summarize the evidence regarding the BC/MC ratio for existing studies and relate it to typical measures of employment effects of UI.
Keywords
Time Allocation and Labor Supply, Unemployment Insurance, Severance Pay, Plant Closings
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