Labor Market Cycles and Unemployment Insurance Eligibility

If entitlement to UI bene…ts must be earned with employment, generous UI is an additional bene…t to an employment relationship, so it promotes job creation. If individuals are risk neutral, UI is fairly priced, and the UI system prevents moralhazard unemployed workers, the generosity of UI has no e¤ect on unemployment. As with Ricardian Equivalence, this result should be useful to pinpoint the e¤ects of UI to violation of its premises. In itself, the endogenous entitlement of UI bene…ts does not resolve if the Mortensen-Pissarides model is able to generate realistic cycles. However, it brings some insights into this debate: The widespread concern in the design of UI systems to minimize moral-hazard unemployment only makes sense if workers have su¢ ciently high values of leisure (80 percent of labor productivity in our baseline calculation for the United States). The fact that the generosity of UI has potentially a small e¤ect on unemployment reconciles a high response of unemployment to changes in labor productivity with a small response to changes in UI bene…ts. JEL classi…cation: E24 E32 J64