I am happy that the paper was finally published. It was a long and arduous journey since I first started working on this idea.
Economics is about humans making choices. I want to tell you about the humans that inspired this paper and the humans that wrote it.
The idea came from an odd couple: my friend John and the Brazilian president Dilma Rousseff.
John didn't really like his job. He devised an audacious plan: do poor enough work to get himself fired, collect unemployment insurance, and chill at home playing FIFA.
Sadly for John, he didn't factor in the whims of President Dilma. Elected under the promise of not cutting labor protections, she implemented a plan that reduced unemployment benefits and tightened eligibility requirements. When John finally got fired, he didn't qualify. In our circle of friends, that story never gets old.
That kept me thinking: how should a government choose its unemployment insurance requirements? I reviewed the literature and studied the practice in other countries.
I found two very interesting facts. The US not only has a tenure requirement, like the one that excluded John, but also a monetary requirement that removes eligibility from workers who make too little money.
At first, excluding those who need benefits the most sounded outrageous. I couldn't find any research documenting the harm of such an anti-poor policy. So me and
@avdluduvice took it upon ourselves to show it.
We wrote down a model of — well — John's behavior. Agents choose to work or not while facing random income shocks. If someone stops working, the government can't tell if it was a quit or a layoff, kind of like what John was hoping. The government's problem is to design unemployment insurance to maximize agents' welfare. Strict requirements give less protection but make it harder for people to engineer their own firing just to collect benefits and play FIFA. So the government faces a clear trade-off, which force dominates is an empirical question.
So I went to the data. I hand-collected historical unemployment requirement data for the US. There was no AI at the time, so all of it was done by human ctrl+c ctrl+v intelligence buried in old government reports. At
@UChicago, that earned me the title of Ghost of the Basement 👻:
Here's what we found. When a state introduces a tenure requirement, workers hop between employers more and are more likely to become part-time, which is consistent with people staying in the job market just long enough to become eligible to UI. The monetary requirement had the opposite effect: workers became less likely to switch jobs or go part-time, consistent with those jobs being less attractive since they no longer come with UI coverage. The data showed that UI requirements matter not only to John.
Using those elasticities to validate the model, we found that the monetary requirement plays an important role, contrary to my initial beliefs. UI increases workers' incentives to accept any job, including ones they'd otherwise turn down. To correct this distortion while still providing insurance, the optimal policy is to exclude low-paying jobs from UI eligibility. This force dominates for two reasons: it reduces the cost of UI, and it creates incentives for workers to search longer for better jobs.