Question

Describe what would happen if we raised the maximum benefit level for unemployment insurance to the savings rate of high income workers. How big are the consumption-smoothing benefits of this policy change likely to be? Are there other potential benefits of raising this maximum benefit level?

Answer 1

High-wage earners would receive more income in the event that they lost their job. This means that they would have to do less “precautionary” saving (savings for the purpose of consumption smoothing after these events). Although this policy would presumably improve consumption smoothing among high-income workers, the benefit is likely to be relatively small for at least two reasons. First, high-income workers presumably already had plenty of income and savings to prepare for temporary unemployment spells; they were probably able to consumption smooth quite well beforehand. Second, high-income workers are usually high-productivity workers; they probably find it relatively easy to find new jobs after becoming unemployed.

However, the fact that these workers have high productivity suggests another benefit of raising the maximum benefit. Insofar as their productivity is specific to a particular type of job, it may take higher-wage workers a relatively long time to find jobs that are good matches to their specific skills that lead to higher productivity. Generous unemployment insurance benefits would allow these productive workers to take more time to find jobs that are better matches that is, jobs that do not waste their human capital.