Job Loss, Consumption and Unemploym ent Insurance
Abstract:
It is well known that job loss is associated wi th both pre- and post-job loss declines in hourly wages and earnings. Using recent data from the Panel Study of Income Dynamics, I show that consumpti on dynamics mirror these wage dynamics. To account for the consumption dyna mics in the data I introduce a correlation between individual hourly wages and job loss into a life-cycle model with self insurance (through savings), social insurance, and endogenous unemployment durations. I find that this model is able to replicate the joint dynamics of wages, job loss and consum ption that we observe in the data. I then show that accounting for the corr elation between wages and job loss has important implications for the optim al design of unemployment insurance (UI). The consumption smoothing benefit s of unemployment insurance are larger, and the cost of insurance lower, th an suggested when this correlation is absent. Thus, while a model that assu mes away these correlations yields optimal UI replacement rates close to ze ro, a model that incorporates the correlations predicts optimal rates of 0. 54, slightly higher than the current US level.
DTSTAMP:20260421T165027Z DTSTART:20141023T173000Z DTEND:20141023T190000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR