Unemployment insurance, mobile capital, output, and distributive effects

Abstract

Scholars and policymakers have focused on the effects of unemployment insurance on job search effort. However, output is an important measure of economic performance, and this paper studies the effects of unemployment insurance on output in a model with capital and labor market frictions. The question concerns whether unemployment insurance is needed to maximize output and whether unemployment should be subsidized or taxed if needed. The answer hinges on the relationship between the elasticity of the marginal product of capital and the elasticity of vacancy-filling rate. Workers’ risk aversion, the known reason in the literature, is neither necessary nor sufficient for unemployment insurance to increase output. In addition, unemployment insurance tends to redistribute from capitalists to workers even if unemployment insurance is financed by taxes on the employed. The paper thus provides new insights into unemployment insurance by focusing on output and distributive consequences.