Walter Nicholson

Unemployment Insurance: Strengthening the Relationship between Theory and Policy

Ever since the U.S. federal-state system of unemployment insurance was founded in the 1930s, it has provided partial, temporary replacement of wages to eligible workers who lose jobs -- through no fault of their own -- (as determined by state-level regulations). Unemployment insurance is one of the largest social insurance programs in the United States, with benefits paid totaling about

General Equilibrium Models: Improving the Microeconomics Classroom

34 billion in 2004. Economic theory can help us understand the challenges this complex program is likely to face over the next few years. We begin by summarizing the salient characteristics of the unemployment insurance program and then examine the theoretical and econometric research. Much of this research revolves around the main goals of the program, which include: 1) sustaining consumption for workers and their families; 2) helping recipients to make efficient job choices during a period of financial stress; and 3) minimizing the adverse incentives that may accompany partial wage replacement. Of course, these goals can come into conflict -- for example, if replacing wages for an unemployed worker also discourages that worker from aggressively searching for or accepting a new job -- and our discussion will focus on these conflicts. In conclusion, we address the key policy issues that the unemployment insurance system is likely to face in upcoming years and ways policymakers may be able to use economic analysis to adjust the program so that it remains effective in addressing the needs of unemployed workers.

Microeconomic Theory: Basic Principles and Extensions

General equilibrium models now play important roles in many fields of economics including tax policy, environmental regulation, international trade, and economic development. The intermediate microeconomics classroom has not kept pace with these trends, however. Microeconomics textbooks primarily focus on the insights that can be drawn from the Edgeworth box diagram for exchange. This treatment leaves students unprepared for understanding much of the policy-related literature they encounter. The lack of attention can be explained: The technical analytics required to mathematically analyze general equilibrium models overwhelm all but a handful of undergraduates. We offer an alternative approach that overcomes this obstacle by providing Web-based general equilibrium simulations. The simulation approach circumvents the complex mathematics so that undergraduates can master the most important lessons of general equilibrium models.