Productivity gains from unemployment insurance

This paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs, and by encouraging firms to create those jobs. We use a quantitative model to investigate whe ther this effect is comparable in magnitude to the standard moral hazard ef fects of unemployment insurance. Our model economy captures the behavior of the U.S. labor market for high school graduates quite well. With unemploym ent insurance more generous than the current U.S. level, unemployment would increase by a magnitude similar to the micro-estimates; but because the co mposition of jobs also changes, total output and welfare would increase as well. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classificatio n: D83; J64; J65.