\documentclass[landscape]{slides}

\usepackage[landscape]{geometry}

\usepackage{pdfpages}

\usepackage{hyperref}
\usepackage{amsmath}

\def\mathbi#1{\textbf{\em #1}}

\topmargin=-1.8cm \textheight=17cm \oddsidemargin=0cm
\evensidemargin=0cm \textwidth=22cm


\author{230B Graduate Public Economics \\ Emmanuel Saez \\ UC Berkeley}
\date{}

\title{Unemployment Insurance} \onlyslides{1-300}

\newenvironment{outline}{\renewcommand{\itemsep}{}}

\begin{document}

\begin{slide}
\maketitle
\end{slide}

\begin{slide}
\begin{center}
{\bf Unemployment Insurance}
\end{center}

Unemployment insurance is a major social insurance program in the U.S.

Spending size: \$50bn/year in normal times (up to \$150bn/year during Great Recession,
around \$800bn from March 2020 to Sept 2021 due to COVID)

Macroeconomic importance in stabilization/stimulus

Like other social programs, triggered by an event

In this case, involuntary job loss

Controversial debate about unemployment benefits

Benefit: helps people in a time of need

Cost: reduces incentive to search for work while unemployed

%What is the optimal design of UI system given this tradeoff?

\end{slide}

\begin{slide}
\includepdf[pages={31}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}


\begin{slide}
\begin{center}
{\bf Institutional Features of Unemployment Insurance}
\end{center}

UI is a federally mandated, state-run program

Although UI is federally-mandated, each state sets its own parameters on the program.

This creates a great deal of variation across states

Useful as a ``laboratory'' for empirical work

$\Rightarrow$ UI is a heavily studied program

In 2020 crisis, most state systems unable to cope with volume and new expanded rules  $\Rightarrow$ Weakness of 
decentralized system
\end{slide}

\begin{slide}
\begin{center}
{\bf Financing of UI Benefits}
\end{center}

1) UI is financed through a payroll tax on employers:

$\Rightarrow$ an employee will not see a deduction for UI on his or her paycheck

This payroll tax averages 1-2\% of earnings (implemented by a percent tax up to earnings cap)

2) UI is partially experience-rated on firms

$\Rightarrow$ the tax that finances the UI program rises as firms have more layoffs, but not on a one-for-one basis

$\Rightarrow$ Industries with few layoffs (e.g. education) end up subsidizing some industries with many layoffs (e.g. construction)

\end{slide}

\begin{slide}
\begin{center}
{\bf Eligibility Requirements and Benefits}
\end{center}

1) Individuals must have earned a minimum amount over the previous year

2) Unemployment spell must be a result of a layoff, rather than from quitting or getting fired for cause
(easy to check)

3) Individual must be actively seeking work and willing to accept a job comparable to the one lost
(hard to check)

These eligibility requirements mean that not all of the unemployed actually collect benefits

Even among eligible, 50\% do not take-up the UI benefit
(lack of information about eligibility, stigma from collecting a government handout, or transaction costs)

Take-up typically lower in good times and depends on how hard
states make enrollment (e.g. Florida makes it hard)


\end{slide}

\begin{slide}
\includepdf[pages={30}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}



\begin{slide}
\begin{center}
{\bf UI  Benefits}
\end{center}

UI benefits are a function of previous earnings

These benefits vary by state.

The replacement rate is the amount of previous earnings that is replaced by the UI system.

$R = B/W$

Replacement rates vary from 35\% to 55\% of earnings

In 2020 coronavirus crisis, CARES increased weekly benefits by \$600 across the board for 4 months,
and expands eligibility to self-employed and lower earners (+\$300 in Jan-Sep 2021)

Average UI benefit jumped up from \$400 to \$1000/week. Person on \$15/hour wage making \$600/week made more on UI. Uniform \$600/week done bc of admin simplicity


\end{slide}

\begin{slide}
\includepdf[pages={2}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}


\begin{slide}
\begin{center}
{\bf UI  Benefits Duration}
\end{center}

In general, one can collect UI for 6 months.

In recessions, benefits are automatically extended to 9 months or 12 months

In deep recessions, benefits can be further extended (23 months in
2008-13)

Duration of UI benefits typically higher in European countries

In 2020 COVID crisis, UI extended to Sept 2021 for all the unemployed (including
the previously self-employed).

EU countries tend to have more generous and longer benefits
\end{slide}

%\begin{slide}
%\includepdf[pages={3}]{UIDIWC_ch14_new_attach.pdf}
%\end{slide}

\begin{slide}
\begin{center}
{\bf Analysis of Optimal Unemployment Insurance}
\end{center}

Optimal UI trades-off insurance value vs. efficiency costs

In principle, provide full insurance (perfect consumption smoothing) with 100\% 
replacement rate if there is no moral hazard

With moral hazard, 100\% replacement rate would eliminate incentives to find a job

$\Rightarrow$ Optimal replacement rate should be less than 100\% %(partial insurance)

Optimal replacement rate depends negatively on the size of moral hazard and positively
on how much people value insurance 

Empirical work examines size of moral hazard and value of UI for consumption smoothing


\end{slide}


\begin{slide}
\begin{center}
{\bf Expected Utility Model}
\end{center}

Individual's expected utility:
\[ EU = (1-p) u(c_e) + p u(c_u) = (1-p)u(w-t) + p u(b) \]
$p$: probability of being unemployed

$c_e$ = consumption when employed,

$c_u$ = consumption when unemployed

$w$ = wage when working

$t$ = tax used to finance program,

$b$ = UI benefit

Government needs to balance budget (taxes fund benefits):
\[(1-p) \cdot t = p \cdot b \quad  \Rightarrow \quad t= (p/(1-p)) \cdot b \]

\end{slide}

\begin{slide}
\begin{center}
{\bf Optimal UI with no moral hazard}
\end{center}
No moral hazard means that $p$ is not affected by UI

Plugging in govt. budget constraint, rewrite individual's expected utility as:
\[ EU = (1-p)u(w-(p/(1-p))b) + p u(b) \]

Government's problem: find $b$ that maximizes $EU$:
\[\text{FOC:} -(1-p)u'(c_e) p /(1-p) + p u'(c_u) =0 \Rightarrow u'(c_e)=u'(c_u) \]

Optimal benefit $b^*$ will be $b$ such that: $c_u=c_e$

This is \textbf{full insurance} (as in optimal tax theory)
\end{slide}


\begin{slide}
\begin{center}
{\bf Optimal UI with moral hazard}
\end{center}
Moral hazard: individual spends effort to look for a job and reduce $p$:
\[ EU = \max_p = (1-p)\cdot u(w-t) + p \cdot u(b) - \psi(1-p) \]
with $\psi(1-p)$ increasing and convex in $1-p$. 
\[ \text{FOC: } u(w-t)-u(b)=\psi'(1-p) \]
With moral hazard, $p$ increases with $b$ as more generous benefits
deter job search and hence increase unemployment

Government now chooses $b$ to maximize $EU$ but taking into account
that $p$ is a function of $b$ in the budget constraint
\[ EU = (1-p)\cdot u(w-[p(b)/(1-p(b))]b) + p \cdot u(b) - \psi(1-p) \]

\small
Note: envelope theorem: individual chooses $p$ optimally
\[ \text{FOC: } -p u'(c_e) + p u'(c_u) - (1-p)u'(c_e)\frac{p'(b)b}{(1-p)^2} = 0 \] 
\end{slide}


\begin{slide}
\begin{center}
{\bf Optimal UI with moral hazard}
\end{center}
Get \textbf{Baily-Chetty} formula:
\[ \frac{u'(c_u)-u'(c_e)}{u'(c_e)} = \frac{1}{1-p} \varepsilon_{p,b}   \text{ with }
\varepsilon_{p,b}  = \frac{b}{p} \cdot \frac{dp}{db}\]
$\varepsilon_{p,b}>0$ is the  elasticity of unemployment rate with respect to benefits (captures
size of moral hazard effects)

Now $0<c_u<c_e<w$: partial insurance is optimum. 

Insurance-efficiency tradeoff:

$b$ increases with curvature of
$u(.)$

$b$  decreases with elasticity $\varepsilon_{p,b}$
\end{slide}


\begin{slide}
\begin{center}
{\bf Self-insurance vs. social insurance}
\end{center}
Baily-Chetty model is static with no-self insurance but can be extended to dynamic model and self-insurance
and same formula carries over

\textbf{Theory:} Unemployment shock is short relative to life-time \\ 
$\Rightarrow$ Intertemporal maximizers should self-insure with savings \\  
$\Rightarrow$ Little need for UI program as $c^u$ close to $c^e$ even absent UI

\textbf{Practice:} Large fraction of population has no buffer stock \\
$\Rightarrow$ $c^u$ and $c^e$ differ substantially (see below) \\
$\Rightarrow$ Need for UI program

Optimal UI theory is based on individual risk aversion rather than social welfare weights (like optimal tax)

pro: no social objective necessary \\ cons: individuals don't self-insure like they are risk averse


\end{slide}



\begin{slide}
\begin{center}
{\bf Empirical Estimation of Effects of UI}
\end{center}

Moral hazard in UI manifests itself in the duration of the unemployment spell

Economists ask whether the unemployed find jobs more slowly when benefits are higher

Key challenge: need to use quasi-experiments to identify these effects

One common empirical approach (Meyer 1990): difference-in-difference

Exploit changes in UI laws that affect a ``treatment'' group and compare to a ``control'' group

\end{slide}

\begin{slide}
\includepdf[pages={4}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}

\begin{slide}
\begin{center}
{\bf Empirical Estimation: UI Benefits Generosity}
\end{center}

Meyer (1990) implements this method using data on unemployment durations in the U.S. and state-level reforms

General finding: benefit elasticity of 0.4-0.6

10\% rise in unemployment benefits leads to about a 4-6\% increase in unemployment durations.

More recent empirical approach \textbf{Regression Kink Design}: UI benefits max out based on previous earnings creating a kink

Card, Lee, Pei, Weber ECMA'15 pioneered RKD for UI in Austria: unemployment duration is also ``kinky'' based on previous earnings

RKD estimate: Change in slope of outcome at kink / Change in slope of benefits at kink $\Rightarrow$ Larger elasticity 
around 1 (but not super precise)

\end{slide}

\begin{slide}
\includepdf[pages={33, 34}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}


\begin{slide}
\begin{center}
{\bf Empirical Estimation of Effects of UI: \\ UI Potential Duration}
\end{center}

Great interest in whether longer potential UI benefits lead to longer UI spells

More recent empirical approach:
\textbf{regression discontinuity}

Card-Chetty-Weber (2007) use the fact that in Austria, you get up to 30 weeks of benefits when you have
been employed for 36+ months in last 5 years (instead of up to 20 weeks)

Can look at duration of unemployment based on how long you have worked in last 5 years


$\Rightarrow$ Finds fairly small elasticity around 0.3

\end{slide}


\begin{slide}
\includepdf[pages={5}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}

\begin{slide}
\begin{center}
{\bf Effects of UI expansion during COVID}
\end{center}

Ganong et al. (2021) analyze the impact of the huge UI expansion during COVID
using JP Morgan bank data

They find that weekly exit rate from UI to new job:

a) jumps up from 1.8\% to 2.6\% when \$600 supplement ends 

b) jumps down from 2.6\% to 2.0\% when \$300 suppl. starts

$\Rightarrow$ Negative moral hazard effects of UI

But quantitative effect is very small, indeed almost invisible in time series of unemployment
rate decline during recovery

$\Rightarrow$ UI was an efficient way to help job losers during COVID

\end{slide}


\begin{slide}
\includepdf[pages={32}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}

\begin{slide}
\begin{center}
{\bf Reference-Dependent Job Search: \\ Two-step UI in Hungary}
\end{center}
Dellavigna et al. QJE'17  study a reform of UI in Hungary which introduced a two-step level of UI benefits:

Before Nov 2005: same benefit for 270 days

After Nov 2005: higher benefit for 90 days, lower benefit from day 91-270

1) Job findings are very similar for first 60 days (inconsistent with standard model)

2) Increase in job findings in anticipation of, and especially following, benefit cuts

Reference-Dependent model proposed: people get used to benefit level (and reduce search effort) and dislike a drop in benefits
(and increase search effort)

\end{slide}


\begin{slide}
\includepdf[pages={35, 36}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}

\begin{slide}
\begin{center}
{\bf Evidence on Consumption-Smoothing}
\end{center}

Difference-in-difference strategy has been used to examine how UI benefits affects consumption (Gruber 1997):

1) consumption falls on average when people lose their job by about 10-15\%

2) Size of drop depends on UI: \$1 increase in UI benefits increases consumption by 30 cents

Much less than 1-1 because savings behavior changes, spousal labor supply, borrowing from friends, etc.
(self-insurance)

Recent study by Ganong-Noel AER'19 uses bank account data to follow people through UI spell

$\Rightarrow$ Finds big effects of UI benefit exhaustion on consumption especially for groups with high replacement rates or low wealth

\end{slide}

\begin{slide}
\includepdf[pages={21-23}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}


\begin{slide}
\begin{center}
{\bf Does UI have Long-Term Benefits?}
\end{center}

Another potential benefit of UI, neglected in simple model above: improvements in \textbf{match quality}

Are people forced to take worse jobs because they have to rush back to work to put food on the table?

%E.g. engineer starts working at McDonalds.

Can examine this using similar data

Look at whether people who got higher benefits and took longer to find a job are better off years later

Card-Chetty-Weber (2007) exploit again the \textbf{regression discontinuity} and find no long-term match benefit
on subsequent wage or subsequent job duration

More recent work suggests that scarring effect of unemployment spell length and being more choosy cancel out
(Schmieder, von Wachter, Bender AER16)
\end{slide}

\begin{slide}
\includepdf[pages={6,7}]{UIDIWC_ch14_new_attach.pdf}
\end{slide}

\begin{slide}
\begin{center}
{\bf Summary of Empirical Findings on UI}
\end{center}

1. Higher benefit level $\Rightarrow$ longer unemployment durations (moral hazard cost)

2. Higher benefit level $\Rightarrow$ more consumption while unemployed (consumption smoothing benefit)

3. UI benefits have no beneficial effects on long-term job outcomes

$\Rightarrow$ Model implies that providing some UI is desirable but UI replacement rate should
be only around 50\% based on those empirical findings

Moral hazard cost during deep recessions (such as COVID) seems smaller $\Rightarrow$ it makes
sense to make UI more generous in recessions

\end{slide}

%\begin{slide}
%\begin{center}
%{\bf UI and Firm Behavior: Experience Rating}
%\end{center}
%
%Effect of UI on firms comes from experience rating
%
%Perfect experience rating for firms: if firm A lays a person off, firm A pays
%taxes to make up for the costs firm A imposes on the UI system
%
%Employers with a lot of layoffs get taxed more
%
%In practice, we have partial experience rating
%
%Firm does not fully pay an additional tax each time it lays off a worker.
%
%Payroll taxes rise less than one-for-one with layoffs because of cap on UI tax
%
%$\Rightarrow$ Empirical studies find that imperfect experience rating leads to more
%layoffs
%\end{slide}
%
%\begin{slide}
%\includepdf[pages={8}]{UIDIWC_ch14_new_attach.pdf}
%\end{slide}
%
%
%\begin{slide}
%\begin{center}
%{\bf Partial Experience Rating and Temporary Layoffs}
%\end{center}
%
%Partial experience rating subsidizes firms with high layoff rates.
%
%Firms and workers may make a joint decision whether to place the worker on temporary layoff, with a promise of being hired back later.
%
%UI system makes this a partially paid vacation.
%
%With partial experience rating, government ends up sharing in the cost of the vacation.
%\end{slide}
%

%\begin{slide}
%\begin{center}
%{\bf Experience Rating in Canada}
%\end{center}
%
%UI systems in other countries create even more moral hazard inefficiency on the firm side than in the U.S.
%
%In Canada, UI is financed through a flat payroll tax, unrelated to actual layoff behavior.
%
%In Canada, workers only have to work 10 weeks to qualify for 42 weeks of UI with a replacement rate of 60\%.
%\end{slide}
%
%\begin{slide}
%\begin{center}
%{\bf Example: Distortions in Canadian Fishing}
%\end{center}
%Consequences of imperfect experience rating:
%
%You and four friends buy a fishing boat, and can catch \$40,000 in fish over 10 weeks, or \$8,000 per person.
%
%In the absence of UI, \$8,000 is not enough for you or your friends to want to operate this business.
%
%With Canada's UI system, you work for 10 weeks and are then ``laid off''. Your earnings were \$800 per week, of which 60\% is replaced by UI for the remainder of the year.
%
%Your benefit from UI is 0.6*800*42, or \$20,160.
%
%With UI, each person gets \$28,160 for only 10 weeks of work.
%
%UI induces inefficiently large number of fisherman, construction workers, etc.
%\end{slide}
%

%\begin{slide}
%\begin{center}
%{\bf Partial Experience Rating and Layoffs: Evidence}
%\end{center}
%
%Empirical studies have examined state systems with different degrees of experience rating using difference-in-difference methods
%
%They find that partial experience rating increases the rate of temporary layoffs.
%
%Partial experience rating alone can account for one- third of all temporary layoffs in the U.S.
%\end{slide}
%
%\begin{slide}
%\begin{center}
%{\bf The Benefits of Partial Experience Rating}
%\end{center}
%
%What is the benefit of partial experience rating?
%
%Fully experience rated UI would ``hit firms while they are down.''
%
%Similar to ``consumption smoothing'' for workers
%
%Conceptually, tradeoff is similar to that we discussed for individual workers
%
%But for firms, smoothing benefits are weaker
%
%Firms have collateral - should be easier to get a loan
%
%Most economists agree that UI should be fully
%experience rated\end{slide}
%

\begin{slide}
\begin{center}
{\bf Should UI Benefits be Extended during Recessions?}
\end{center}
US extends UI benefits during recessions. Extensions ended in 2014 (controversial policy debate)

\textbf{1) Social Justice:} Harder to find jobs in recessions $\Rightarrow$ being unemployed is less of a choice 

$\Rightarrow$ Extending benefits is desirable for fairness 

\textbf{2)  Efficiency:} In recessions, the job market is too slack [harder to find jobs, easier for firms to find workers]
$\Rightarrow$ discouraging search effort in recessions is not as problematic. 

Furthermore, UI benefits support spending and hence the economy (through short-term macro effects) 

$\Rightarrow$ Extending benefits is desirable for efficiency

%If longer UI benefits decrease slack in labor market then longer UI benefits desirable [this is the case if UI benefits stimulate aggregate demand or if job seekers compete for a fixed number of jobs in recession, this is the left-wing view]

%b) If longer UI benefits increase slack in labor market then shorter UI benefits desirable [this is the case if longer UI benefits
%increase the bargaining power of workers and hence increase wages further reducing labor demand, this is the right-wing
%view]

%\normalsize
%Economists try to tell apart a) from b) using empirical evidence



\end{slide}




\begin{slide}
\begin{center}
{\bf REFERENCES}
\end{center}
{\small

%Jonathan Gruber, Public Finance and Public Policy, Fifth Edition, 2016 Worth Publishers, Chapter 14

\textbf{Card, David, Raj Chetty, and Andrea Weber. ``The Spike at Benefit Exhaustion: Leaving the Unemployment System or Starting a New Job?.'' The American Economic Review 97.2 (2007): 113-118.\href{http://www.jstor.org/stable/pdfplus/30034431.pdf}{(web)} }

Card, David, David S. Lee, Zhuan Pei, and Andrea Weber. 2015. ``Inference on Causal Effects in a
Generalized Regression Kink Design.'' Econometrica 83 (6): 2453-83.
\href{https://www.jstor.org/stable/pdf/43866417.pdf} {(web)}

DellaVigna, Stefano, Attila Lindner, Balazs Reizer, and Johannes F. Schmieder. ``Reference-dependent job search: Evidence from Hungary.'' Quarterly Journal of Economics 132, no. 4 (2017): 1969-2018.
\href{https://www.jstor.org/stable/pdf/26372721.pdf} {(web)}

\textbf{Ganong, Peter  and Pascal Noel. 2019. ``Consumer Spending During Unemployment: Positive and Normative Implications.''  American Economic Review
\href{http://elsa.berkeley.edu/~saez/course131/ganong-noelAER19UI.pdf}{(web)} }

Ganong, Peter, Fiona Greig, Pascal Noel, 
Daniel M. Sullivan, Joseph Vavra. 2021. ``Micro and Macro Disincentive Effects of Expanded Unemployment
Benefits''.
\href{http://elsa.berkeley.edu/~saez/course131/ganongetal21UIcovid.pdf}{(web)}

Gruber, Jonathan. ``The Consumption Smoothing Benefits of Unemployment Insurance.'' The American Economic Review (1997).\href{http://www.nber.org/papers/w4750.pdf}{(web)}

Gruber, Jonathan. ``Covering the Uninsured in the United States.'' Journal of Economic Literature, 43.3 (2008): 571-606.\href{http://www.nber.org/papers/w13758.pdf}{(web)}

Meyer, Bruce D. ``Unemployment Insurance and Unemployment Spells.'' Econometrica 58.4 (1990): 757-782.\href{http://www.jstor.org/stable/pdfplus/2938349.pdf}{(web)}

Schmieder, Johannes F., Till von Wachter, and Stefan Bender. ``The effect of unemployment benefits and nonemployment durations on wages.'' American Economic Review 106, no. 3 (2016): 739-777.
\href{https://www.jstor.org/stable/pdf/43821469.pdf}{(web)}


}
\end{slide}



\end{document}
