UNEMPLOYMENT-INSURANCE AND EXPERIENCE RATING IN A SIMPLE-MODEL OF INVOLUNTARY UNEMPLOYMENT

Standard results in the area of unemployment insurance suggest that ex perience rating is beneficial because it confronts firms with layoff c osts and reduces unemployment. This article presents a different persp ective, suggesting that experience rating may increase involuntary une mployment. A simple model that combines elements of efficiency wage an d insider-outsider hypotheses is used to address the issues. Results s how that experience rating causes significant wage and unemployment ef fects. Thus, standard conclusions in the experience-rating literature may not easily carry over to models of involuntary unemployment From a policy perspective, this article suggests that costs and benefits of experience rating should be carefully evaluated, especially when unemp loyment is involuntary.