Since the great recession one of the most discussed topics has been the unemployment insurance (UI) and its effects on the labor market outcomes.  There are two opposed points of view in the assessing of the UI regarding social welfare, namely, the authors who consider UI creates negative net effect in terms of unemployment duration and, on the other hand, the authors who believe in the positive role of this social program, even as an countercyclical component to deal with recession periods.  In this article I am going to summarise the main channels through a change in the generosity of UI modifies —both positive and negatively— some labor markets indicators.

There are two levels of analysis in the assessment of how UI impacts social welfare. One level considers these impacts from a partial equilibrium approach. The idea here is to evaluate how this policy modifies the labor market outcomes of the group of individuals directly affected: UI beneficiaries. A more generous UI may affect the beneficiaries in two ways. On the one hand, this change reduces the incentive or the effort to seeking a job. As the jobseeker has ensured an allowance thanks to the UI, he is less desperated to get a new job. A consequence of this is that his unemployment period lengthens, which would harm his human capital formation over time. The idea that this goes against social welfare is that a larger unemployment duration is not optimal since the presence of UI creates a moral hazard problem by subsidizing unemployment.

On the other hand, a more generous UI benefit can enhance social welfare by improving smooth consumption. When a worker loses her job this worker has to deal with the absent of wage. At this point, a smoothing consumption problem appears. A way to alleviate this negative shock is by using the income that comes from UI benefits. To be continued…