David L. Fuller

Adverse Selection and Moral Hazard: Quantitative Implications for Unemployment Insurance

I construct a dynamic contracting model of optimal unemployment insurance with adverse selection and moral hazard. The interaction of the two informational frictions generates novel qualitative and quantitative implications for the provision of unemployment insurance. Qualitatively, for certain agents, incentives in the optimal contract imply expected consumption may actually increase over the duration of unemployment. Quantitatively, the optimal contract reduces costs by over 100%, relative to a stylized version of the current U.S. unemployment insurance system. Compared to a planner who ignores adverse selection and focuses only on moral hazard, the optimal contract achieves an additional 47% of cost savings. Of the extra savings, around 3.2% arises from improved incentives to exert effort, leading to higher expected output. A more efficient allocation of consumption explains the remaining portion of the additional cost savings.

Productivity insurance: the role of unemployment benefits in a multi-sector model

We construct a multi-sector search and matching model where the unemployed receives idiosyncratic productivity shocks that make working in certain sectors more productive than in the others. Agents must decide which sector to search in and face moving costs when leaving their current sector for another. In this environment, unemployment is associated with an additional risk: low future wages if mobility costs preclude search in the appropriate sector. This introduces a new role for unemployment benefits – productivity insurance while unemployed. For plausible parameterizations unemployment benefits increase per-worker productivity. In addition, the welfare-maximizing benefit level decreases as moving costs increase.

Estimating the relationship between labour market tightness, unemployment insurance benefits and union election activity

ABSTRACT Using detailed data from the US National Labor Relations Board, we find labour market tightness, defined as the ratio of job vacancies to the number of unemployed, has a positive relationship with the likelihood of voting in favour of union representation. Specifically, a 1 SD increase in labour market tightness increases Vote Share in favour and the likelihood of union certification by roughly 1.5% and 3%, respectively. We also find that length of unemployment insurance benefits has a positive relationship with Vote Share in favour. Taken together, these results suggest that workers are more comfortable engaging in pro-union election behaviours when exogenous conditions, like labour market tightness and unemployment insurance benefit duration, shift in a way that more favourably insulates them from unemployment and income risk.