Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Unemployment Insurance Policy with Endogenous Labor Force Participation

Vol.19, No.4, December , 1–36



  •   (Department of Economics, Korea University)

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Abstract  

We construct a variant of the Mortensen-Pissarides matching model in which a worker's labor force participation decision is endogenous. The distinction between unemployment and nonparticipation, two non-working states, is due to a worker's job search behavior. A key feature of the model is that heterogeneity in productivity is introduced in order to characterize a worker's endogenous search intensity choice. A distinguishing result from the quantitative experiment of the unemployment insurance (UI) policy is that an increase in UI benefits has a significant impact on the labor force size as well as on the composition of the labor force, which crucially depends on the authority's ability to monitor the moral hazard. With perfect monitoring, more generous UI benefits increase both the ratios of employment and unemployment to population. In the absence of monitoring, we find the opposite results.


Keywords
   Heterogeneity, Labor Force Participation, Matching, Moral Hazard, Search, Unemployment Insurance, Worker Flows

JEL classification codes
   E24, E61, J21, J65
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