Unemployment compensation under partial program coverage

Abstract

More than half of the unemployed in the U.S. are not covered by unemployment insurance. For them the provision of employment-dependent UI creates an additional benefit from work: future UI eligibility. This paper explores the overall and distributional effects of providing unemployment compensation under partial coverage. I extend a standard search model to accommodate eligible and non-eligible workers, where eligibility status is determined by previous separation history. While the effect of unemployment benefits on unemployment duration and post unemployment wages is theoretically ambiguous, a calibration of the model to the U.S. economy shows that unemployment benefits raise the unemployment rate. In addition I show that wage gaps and unemployment duration differentials between the eligible and non-eligible exist and are larger when layoffs are high.