ABSTRACT
The conventional wisdom argues that unemployment insurance serves to increase the rate of unemployment by various means. Unemployment rates are said to increase by attracting in to the labor market individuals who intend to quit their new jobs so as to collect this benefit, by increasing the voluntary job search time of those unemployed workers who are already in the labor force, by inducing increasing quit rates of the currently employed so that they search for better jobs, and by increasing the market wage thereby increasing the price of labor and reducing the overall competitiveness of the economy. Moreover, following upon the efficiency wage literature, unemployment insurance is expected to reduce the effort incentive effect of a given rate of unemployment, both forcing up real wages to compensate and, thereby, increasing the unemployment rate. It is further assumed that the marginal worker maximizes utility or economic well-being at low levels of real income thus allowing unemployment insurance to serve as a utility maximizing “wage of being unemployed.” Thus, some workers maximize their utility by getting themselves laid off so as to take advantage of unemployment insurance.
