Productivity gains from unemployment insurance

This paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs, and by encouraging firms to create those jobs. We use a quantitative model to investigate whether this effect is comparable in magnitude to the standard moral hazard effects of unemployment insurance. Our model economy captures the behavior of the U.S. labor market for high school graduates quite well. When unemployment insurance becomes more generous starting from the current U.S. levels, there is an increase in unemployment similar in magnitude to the micro-estimates, but because the composition of jobs also changes, total output and welfare increase as well. ∗This paper is prepared for the International Seminar on Macroeconomics 1999. Thanks to seminar participants there, at the London Business School, and at the NBER Summer Institute, and to Gadi Barlevy, Olivier Blanchard, Charles Bean, Robert Gordon, Jonathan Gruber, Per Krusell, James Poterba, two anonymous referees, and the editor for comments.