Seminar

On the Provision of Unemployment Insurance when Workers are Ex-ante Heterogeneous

Yaniv Yedid-Levi (Vancouver School of Economics - The University of British Columbia)

September 26, 2017, 17:00–18:30

Room MS 001

Macroeconomics Seminar

Abstract

Labor market outcomes demonstrate considerable variation by skill. We construct a general equilibrium model with incomplete markets and ex-ante skill-differences that matches these facts. We study the role of skill-differences in choosing the generosity of Unemployment Insurance (UI) in the model. The optimal replacement rate is 33%, compared to 15% in a model with ex-ante homogeneous workers. This is because of differences in both labor income and unemployment risk: the former creates and incentive to redistribute, while the latter makes redistribution possible. The higher replacement rate is due to the role of UI as a mean of redistribution across types.