ABSTRACT
The liberalization of unemployment insurance has occurred since the World War II by extension of coverage to new categories of workers. The employment stabilization effects of the unemployment insurance have been of interest since the beginning program. The impact of unemployment insurance has been extensively studied in the literature. Under liquidity constraint the unemployed worker is led to reduce the duration of unemployment, and to increase the intensity of searching a new job. Unemployment insurance would increase social welfare by distributing the risk-averse labors more efficiently between low risk and high risk jobs, shifting the production possibility frontier. In addition to the direct effect of unemployment insurance on wage, it might raise the average productivity of labors indirectly by improving the match between jobs and workers. Unemployment insurance could be considered as subsidizing workers to sort themselves into jobs to maximize their joint output and earnings.
