Productivity gains from unemployment insurance

This paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs, and by encouraging firms to create those jobs. We use a quantitative model to investigate whether this effect is comparable in magnitude to the standard moral hazard effects of unemployment insurance. Our model economy captures the behavior of the U.S. labor market for high school graduates quite well. With unemployment insurance more generous than the current U.S. level, unemployment would increase by a magnitude similar to the micro-estimates; but because the composition of jobs also changes, total output and welfare would increase as well. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: D83; J64; J65.