Job Market Paper: Optimal Unemployment Insurance with Liquidity Provision

Abstract: Many countries simultaneously provide Unemployment Insurance (UI) and a Severance Package (SP) upon redundancy. This paper is the first to leverage this feature and analyse the interactions between this liquidity provision at the onset of unemployment and the optimal unemployment benefits (UB) profile. Using French administrative data and a combination of regression discontinuity and kink designs, I show that the optimal UI should provide liquidity only at first, and then unemployment benefits to insure individuals in case of long-term unemployment, thus leading to an increasing benefits profile through the presence of a waiting period. This conclusion results from a combination of findings. First, UB paid early in the unemployment spell have a significantly larger moral hazard cost compared to the SP, while these two instruments have similar consumption smoothing values. Secondly, providing less UB early in the spell affects the dynamic selection into long-term unemployment. It screens out the high-types, therefore raising the value of benefits paid later through a better targeting. This reinforces the incentive to implement an increasing benefits profile. Finally, I show suggestive evidence which indicate that the planner should push the steepness of the optimal UB profile all the way to a corner solution. The optimal design of UI should then be made of a SP at the onset of unemployment and of UB only in case of long-term unemployment.

Work In Progress: Can Unemployment Insurance Reduce Job Stability ?

Abstract: With a rising share of temporary contracts with shorter durations in new hirings, the number of transitions between employment and unemployment has significantly increased in developed countries over the last decades. To take into account this evolution and improve Unemployment Insurance (UI) coverage, the French UI reform of 2014 introduced a "top-up of entitlement" mechanism. For unemployed individuals receiving benefits, this mechanism reduced the minimum number of working days necessary to top-up one's entitlement to UI by more than four - from 122 to 30. The potential value of short temporary contracts therefore increased. The effects of this top-up of entitlement mechanism are analysed using a fuzzy regression kink design based on the timing of the reform. Relying on administrative data from the French National Employment Agency, I show that the reform indeed incentivised the unemployed to accept short temporary contracts, decreased their reservation wage, and increased their probability to become unemployed again. A heterogeneity analysis shows that this last has a stronger influence on the experienced unemployed, further reducing their attachment to the labour market. It also demonstrates that the effects of this type of mechanism are not evenly distributed. Finally this paper provides the first cost estimate of the top-up mechanism. The rise in the probability to repeat unemployment is estimated to generate an additional cost of €500 to 700 per unemployed individual renewing their entitlement.