Abstract
Previous studies of optimal unemployment insurance (UI) design ignore the impact of UI on human capital investment decisions. We show that fully experience-rated UI increases investment in human capital when future employment opportunities are not known with certainty. In the presence of wage taxation, the optimal level of UI trades off full insurance and the impact, through human capital, of UI on the wage tax base. This trade-off, in turn, depends on the extent to which human capital accumulation reallocates labor between market and untaxed nonmarket activities. Taxation of UI benefits increases the optimal level of UI provision.
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