The generosity of unemployment insurance is often cited as a reason for long spells of joblessness. But this view neglects other important, and potentially positive, economic aspects of such programmes. Using Austrian data, this column presents evidence that unemployment insurance has a positive effect on the quality of jobs that recipients find. This can in turn have a positive effect on future tax revenues, and has implications for the debate on optimal insurance generosity.
As the unemployment insurance system is designed to balance the value of insurance against job loss with the cost of extra taxes, an important policy question is: What is the optimal level of generosity of unemployment insurance? The conventional answer to this question has focused on the effect of unemployment benefits on unemployment durations. As insurance reduces the incentives of jobless agents to find a job, it raises aggregate benefit payments and creates higher taxes for the rest of the population. In the conventional model, this negative fiscal externality is balanced against the insurance or consumption-smoothing value of unemployment insurance to determine the optimal benefit generosity.
However, if unemployment insurance also affects job quality, it might change future tax revenues. The total fiscal externality of the programme should thus be calculated as the sum of the traditional negative externality from increased unemployment durations and the externality from job quality, the sign of which depends on the sign of the effect of unemployment insurance on job quality (and is theoretically undetermined).
Chosen excerpts by Job Market Monitor. Read the whole story at Unemployment benefits and job match quality | VOX, CEPR’s Policy Portal.