L23: Unemployment Insurance, Disability Insurance and Worker's Compensation Flashcards
common features of these three programs
operate in similar ways
provide similar insurance
generate similar moral hazard concerns
unemployment insurance
federally mandated, state-run program in which payroll taxes are used to pay benefits to workers laid off by companies
disability insurance
federal program in which a portion of the social security payroll tax is used to pay benefits to workers who have suffered a medical impairment that leaves them unable to work
workers’ compensation
state-mandated insurance, which firms generally buy from private insurers that pays for medical costs and low wages associated with an on-the-job injury
unemployment insurance in a recession
automatic stabiliser
institutional features of unemployment insurance
partially experience-rated
- tax that finances unemployment insurance rises as firms have more layoffs but not on a one-for-one basis
benefits depend on weekly earnings and rise with earnings up to a maximum amount
optimal unemployment insurance with no moral hazard
probability of being unemployed is not affected by unemployment insurance
full insurance which is optimal with no moral hazard when insurance is actuarially fair
optimal unemployment insurance with moral hazard
probability of being unemployed increases with benefits as more generous benefits deter job search and increase unemployment
partial insurance is optimal
- level decreases with moral hazard
empirical evidence on moral hazard
unemployment falls when benefits expire
increase in levels of benefits also increases unemployment
do longer durations of unemployment insurance represent an undesirable outcome?
yes if it subsidises unproductive leisure
no if it helps people find higher quality job matches
potential economic distortion from unemployment insurance: employer layoff behaviour
laid off workers get benefits so potential moral hazard for employers since government pays workers during slow periods
experience rating: higher payroll taxes for those who layoff more frequently
- reduces the incentive
- reduced completely with perfect experience rating
partial experience rating and temporary layoffs
subsidises firms with high layoff rates
encourages firms to lay workers off since benefits cost is borne neither by worker nor firm
subsidises more volatile industries like construction relative to more stable industries
- economic distortion with DWL
- no change in employer behaviour since they would behave the same way regardless
