A Context-Robust Measure of the Disincentive Cost of Unemployment Insurance

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.