The Value of Unemployment Insurance ( joint with Camille Landais, LSE)

Abstract:

While a large literature has studied labor supply responses to social insurance, the corresponding insurance value of these programs is less understood. This paper implements new approaches to study the value of unemployment insurance using rich administrative data in Sweden. Following the consumption-based approach, we find relatively small drops (~12 percent) in consumption expenditures upon job loss, which for standard risk aversion values translates in a low valuation for UI in comparison to its cost. Limited liquidity and borrowing constraints, however, suggest that the price of smoothing consumption beyond the generous unemployment benefits may be high. We propose a novel approach to uncover this using the wedge in marginal propensities to consume when unemployed vs. employed. This alternative approach delivers a lower bound on the value of UI that is substantially higher and exceeds the cost of UI. We finally use a Revealed Preference approach based on workers' UI choices, exploiting a unique feature in the Swedish UI system, which confirms the high value of UI and reveals substantial dispersion above and beyond variation in consumption drops