The Value of Unemployment Insurance

To study the value of unemployment insurance (UI), the literature has mostly focused on measuring consumption responses to job loss, while also highlighting the many shortcomings of this approach. This paper proposes two novel approaches that we then implement using rich administrative data in Sweden and compare to the consumption-based results for the same sample of job seekers. We first document relatively small drops (∼ 12 percent) in consumption expenditures upon job loss, which would translate into a relatively low valuation for UI following the standard consumption-based implementation. However, using variation in local public transfers, we show that the marginal propensity to consume for this sample of job losers is estimated to be 30−40 percent higher when unemployed than when employed. This reveals a high relative price of smoothing consumption when unemployed, corroborated by direct evidence of limited liquidity, binding borrowing constraints and negligible added worker effects. This price provides a lower-bound on the value of UI, which is substantially higher than the standard consumption-based estimate. Exploiting the UI choices embedded in the Swedish UI system, we then present an alternative Revealed-Preference approach, which confirms the high value of UI in our setting and reveals substantial dispersion above and beyond the variation in consumption drops. Joint with Johannes Spinnewijn.

Keywords: Unemployment Insurance, Consumption Smoothing, Revealed Preference, MPC

JEL codes: H20, J64