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  3. American Economic Review
  4. May 2017
  5. A Context-Robust Measure of the Disincentive Cost of Unemployment Insurance

A Context-Robust Measure of the Disincentive Cost of Unemployment Insurance

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Abstract

This paper proposes a new measure of the disincentive cost of unemployment insurance (UI): the ratio of the behavioral cost (BC) to the mechanical cost (MC) of a UI reform. This measure represents the labor supply distortion relative to the additional (mechanical) transfer from the UI reform. We show the BC/MC ratio naturally arises from a model of optimal UI and can be readily computed and compared across different types of reforms and labor market contexts. We summarize the evidence regarding the BC/MC ratio for existing studies and relate it to typical measures of employment effects of UI.

Citation

Schmieder, Johannes F., and Till von Wachter. 2017. "A Context-Robust Measure of the Disincentive Cost of Unemployment Insurance." American Economic Review, 107 (5): 343-48. DOI: 10.1257/aer.p20171026

Additional Materials

JEL Classification

  • J22 Time Allocation and Labor Supply
  • J65 Unemployment Insurance; Severance Pay; Plant Closings