Insuring Against Unemployment

This paper studies optimal public unemployment insurance (UI) when workers have the possibility of topping-up public UI with private UI that is endogenous to public UI and subject to moral hazard. The issue is analyzed with a theoretical model in which publicly insured workers, who differ in layoff risk, hidden to the planner, are offered to top-up public UI with private UI. In the model, high risk workers top-up while low risk workers abstain from private UI. The result is lower public UI while UI with top-up is more generous compared to UI in a purely public system. Less risk pooling, however, leads to higher costs for mixed UI provision. Then, I show that the effect of public UI on assets, private UI and unemployment duration can be used as sufficient statistics to calibrate the impact on welfare from public UI in the presence of private UI. I estimate the effects using data on a Swedish union run top-up scheme. Identification is achieved using a kinked public UI benefit rule. Calibrating the model shows that workers with mixed UI experience a negative impact on welfare from increased public UI while those with only public UI seem to have about optimal UI coverage.
A vast literature has investigated how unemployment insurance (UI) affects labor supply. However, the distorting effect of UI on labor supply is to a large extent determined by how well UI benefits smooth private consumption, which in turn depends on the resources available to the unemployed. To determine UI's consumption-smoothing effect, I exploit a kink in the deterministic relationship between previous earnings and unemployment benefits. The randomized assignment of benefits created by the kink allows me to identify how UI affect the use of private wealth to finance consumption during unemployment spells. Using Swedish data for 2000-2002 I find that a large share of the unemployed actually can consume at the same level as they did prior to the layoff. I also find that loans are of great importance to consumption smoothing as more than half the sample lacks buffer savings. This is further emphasized for different subpopulations. Women, couples, and older individuals hold significantly larger liquid wealth than men and young singles.
Reduced form estimations of precautionary saving with respect to labor market risk have hitherto failed to consider that a decrease of say unemployment probability or an increase in unemployment insurance (UI) generosity affects saving not only by reducing the expected variance in earnings but also by raising expected earnings. This paper studies the possibility of decomposing the treatment effect of UI on asset accumulation into two parts; one part where more generous UI leads to raised expected earnings and a second part where a more generous UI reduces the expected variation in earnings. The decomposition is applied to rich Swedish register data on both financial assets and debt. UI's effect on assets is identified with a kinked policy rule in the UI scheme. First, increased UI generosity has a significant effect, both economically and statistically, on asset holdings; a one percentage point increase in UI benefits decrease net financial asset holdings by 1 percentage point. Second, decomposing the total effect UI has on asset accumulation shows that raised expected earnings increase savings while a decreased variation in earnings decrease saving. Not accounting for the effect on expected earnings on saving underestimates the impact UI has on precautionary saving by 70 percent.