Does incomplete take-up matter? The case of Unemployment Insurance.

Guimarães, Luis and Lourenço, Diogo (2026): Does incomplete take-up matter? The case of Unemployment Insurance.

Abstract

Only a few of the eligible take up Unemployment Insurance (UI). Yet, the literature evaluating UI in macroeconomic settings typically assumes that take-up is costless and complete. We show that this assumption leads to an overestimation of UI’s net welfare gains in a general equilibrium model with incomplete markets. In fact, when we account for incomplete take-up, we find that the current UI program lowers welfare in the US. Take-up costs are key: they lower individual net gains from UI to the extent that they fail to outweigh the program’s aggregate distortions. Suitably reformed, UI could slightly increase welfare. A uniform transfer of about USD 500 for 14 months to UI recipients would discourage take-up among the better off, reducing distortions and take-up costs, and enhancing redistribution.

• Item Type: MPRA Paper
• Language: English
• Keywords: Unemployment Insurance; Take-up; Welfare; Take-up costs
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J21 - Labor Force and Employment, Size, and Structure; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J65 - Unemployment Insurance ; Severance Pay ; Plant Closings

References

Abrahám, Árpád, João Brogueira de Sousa, Ramon Marimon, and Lukas Mayr. 2023. “On the design of a European Unemployment Insurance System.” European Economic Review, 156: 104469.

Anderson, P. M., and B. D. Meyer. 1997. “Unemployment Insurance Takeup Rates and the After-Tax Value of Benefits.” The Quarterly Journal of Economics, 112(3): 913–937.

Auray, Stéphane, and David L. Fuller. 2020. “Eligibility, experience rating, and unemployment insurance take-up.” Quantitative Economics, 11(3): 1059–1107. _eprint: https://onlinelibrary.wiley.com/doi/pdf/10.3982/QE940.

Auray, Stéphane, David L. Fuller, and Damba Lkhagvasuren. 2019. “Unemployment insurance take-up rates in an equilibrium search model.” European Economic Review, 112: 1–31.

Baily, Martin Neil. 1978. “Some aspects of optimal unemployment insurance.” Journal of Public Economics, 10(3): 379–402.

Banerjee, Abhijit, Rema Hanna, Benjamin A Olken, and Diana Sverdlin Lisker. 2024. “Social Protection in the Developing World.” National Bureau of Economic Research Working Paper 32382.

Benabou, Roland. 2002. “Tax and education policy in a heterogeneous-agent economy: What levels of redistribution maximize growth and efficiency?” Econometrica, 70(2): 481–517.

Birinci, Serdar, and Kurt See. 2023. “Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity.” American Economic Journal: Macroeconomics, 15(3): 388–430.

Birinci, Serdar, and Kurt See. 2024. “The Implications of Labor Market Heterogeneity on Unemployment Insurance Design.” Federal Reserve Bank of St. Louis Working Papers 2024-026.

Burdett, Kenneth, Carlos Carrillo-Tudela, and Melvyn Coles. 2020. “The Cost of Job Loss.” The Review of Economic Studies, 87(4): 1757–1798.

Cai, Zhifeng, and Jonathan Heathcote. 2023. “The Great Resignation and Optimal Unemployment Insurance.” Federal Reserve Bank of Minneapolis Staff Report 652.

Celhay, Pablo, Bruce D. Meyer, and Nikolas Mittag. 2024. “What leads to measurement errors? Evidence from reports of program participation in three surveys.” Journal of Econometrics, 238(2): 105581.

Chan, Marc K. 2013. “A Dynamic Model of Welfare Reform.” Econometrica, 81(3): 941–1001. _eprint: https://onlinelibrary.wiley.com/doi/pdf/10.3982/ECTA9075.

Chao, Ying H. 2025. “A quantitative analysis of relaxing UI eligibility requirements.” Labour Economics, 102712.

Chetty, Raj. 2008. “Moral Hazard versus Liquidity and Optimal Unemployment Insurance.” Journal of Political Economy, 116(2): 173–234. Publisher: The University of Chicago Press.

Davis, Steven J., and Till von Wachter. 2011. “Recessions and the Costs of Job Loss.” Brookings Papers on Economic Activity, 2011(2): 1–72. Publisher: Johns Hopkins University Press.

De Souza, Gustavo, and André Victor D. Luduvice. 2023. “Optimal unemployment insurance requirements.” Working paper (Federal Reserve Bank of Cleveland). Series: Working paper (Federal Reserve Bank of Cleveland).

Dupas, Pascaline, and Radhika Jain. 2024. “Women Left Behind: Gender Disparities in Utilization of Government Health Insurance in India.” American Economic Review, 114(10): 3345–85.

East, Chloe N., and David Simon. 2024. “The safety net and job loss: How much insurance do public programs provide?” Journal of Public Economics, 238: 105171.

Engen, Eric M., and Jonathan Gruber. 2001. “Unemployment insurance and precautionary saving.” Journal of Monetary Economics, 47(3): 545–579.

Falk, Armin, Anke Becker, Thomas Dohmen, Benjamin Enke, David Huffman, and Uwe Sunde. 2018. “Global Evidence on Economic Preferences*.” The Quarterly Journal of Economics, 133(4): 1645–1692.

Finkelstein, Amy, and Matthew J Notowidigdo. 2019. “Take-Up and Targeting: Experimental Evidence from SNAP*.” The Quarterly Journal of Economics, 134(3): 1505–1556.

Forsythe, Eliza, and Hesong Yang. 2021. “Understanding Disparities in Unemployment Insurance Recipiency.” US Department of Labor.

Ganong, Peter, and Pascal Noel. 2019. “Consumer Spending during Unemployment: Positive and Normative Implications.” American Economic Review, 109(7): 2383–2424.

Guimarães, Luis, and Diogo Lourenço. 2024. “The Imperfections of Conditional Programs and the Case for Universal Basic Income.” University Library of Munich, Germany MPRA Paper.

Haan, Peter, and Victoria Prowse. 2024. “The Heterogeneous Effects of Social Assistance and Unemployment Insurance: Evidence from a Life Cycle Model of Family Labor Supply and Savings.” American Economic Journal: Macroeconomics, 16(2): 127–181.

Hansen, Gary D., and Ay¸se Imrohoro˘glu. 1992. “The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard.” Journal of Political Economy, 100(1): 118–142. Publisher: University of Chicago Press.

Heathcote, Jonathan, Kjetil Storesletten, and Giovanni L. Violante. 2017. “Optimal Tax Progressivity: An Analytical Framework*.” The Quarterly Journal of Economics, 132(4): 1693–1754.

Herd, Pamela, and Donald Moynihan. 2025. “Administrative Burdens in the Social Safety Net.” Journal of Economic Perspectives, 39(1): 129–150.

Hopenhayn, Hugo A., and Juan Pablo Nicolini. 1997. “Optimal Unemployment Insurance.” Journal of Political Economy, 105(2): 412–438. Publisher: The University of Chicago Press.

Jaimovich, Nir, Itay Saporta-Eksten, Ofer Setty, and Yaniv Yedid-Levi. 2024. “Universal Basic Income: Inspecting the Mechanisms.” The Review of Economics and Statistics, 1–27.

Johnston, Andrew C., and Alexandre Mas. 2018. “Potential Unemployment Insurance Duration and Labor Supply: The Individual and Market-Level Response to a Benefit Cut.” Journal of Political Economy, 126(6): 2480–2522. Publisher: The University of Chicago Press.

Kehoe, Patrick J., Virgiliu Midrigan, and Elena Pastorino. 2019. “Debt Constraints and Employment.” Journal of Political Economy, 127(4): 1926–1991.

Kekre, Rohan. 2023. “Unemployment insurance in macroeconomic stabilization.” Review of Economic Studies, 90(5): 2439–2480.

Kleven, Henrik Jacobsen, and Wojciech Kopczuk. 2011. “Transfer Program Complexity and the Take-Up of Social Benefits.” American Economic Journal: Economic Policy, 3(1): 54–90.

Koehne, Sebastian, and Moritz Kuhn. 2015. “Should unemployment insurance be asset tested?” Review of Economic Dynamics, 18(3): 575–592.

Kroft, Kory. 2008. “Takeup, social multipliers and optimal social insurance.” Journal of Public Economics, 92(3): 722–737.

Kroft, Kory, and Matthew J. Notowidigdo. 2016. “Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence.” The Review of Economic Studies, 83(3): 1092–1124.

Krueger, Alan B., and Andreas Müller. 2011. “Job Search and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data.” Princeton University.

Krusell, Per, Toshihiko Mukoyama, and Ay¸segül ¸Sahin. 2010. “Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations.” The Review of Economic Studies, 77(4): 1477–1507.

Krusell, Per, Toshihiko Mukoyama, Richard Rogerson, and Ay¸segül ¸Sahin. 2017. “Gross Worker Flows over the Business Cycle.” American Economic Review, 107(11): 3447–76.

Kuka, Elira, and Bryan Stuart. 2022. “Racial Inequality in Unemployment Insurance Receipt and Take-Up.” Federal Reserve Bank of Philadelphia Working paper (Federal Reserve Bank of Philadelphia) 22-09. Series: Working paper (Federal Reserve Bank of Philadelphia).

Lachowska, Marta, Isaac Sorkin, and Stephen A Woodbury. 2022. “Firms and Unemployment Insurance Take-up.” National Bureau of Economic Research Working Paper 30266.

Landais, Camille. 2015. “Assessing the Welfare Effects of Unemployment Benefits Using the Regression Kink Design.” American Economic Journal: Economic Policy, 7(4): 243–278.

Ljungqvist, Lars, and Thomas J. Sargent. 1998. “The European Unemployment Dilemma.” Journal of Political Economy, 106(3): 514–550.

Low, Hamish, and Luigi Pistaferri. 2015. “Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off.” American Economic Review, 105(10): 2986–3029.

Low, Hamish, Costas Meghir, Luigi Pistaferri, and Alessandra Voena. 2022. “Marriage, Labor Supply and the Dynamics of the Social Safety Net.” National Bureau of Economic Research Working Paper 24356.

Marinescu, Ioana, and Daphné Skandalis. 2021. “Unemployment Insurance and Job Search Behavior*.” The Quarterly Journal of Economics, 136(2): 887–931.

Michelacci, Claudio, and Hernán Ruffo. 2015. “Optimal Life Cycle Unemployment Insurance.” American Economic Review, 105(2): 816–859.

Mitman, Kurt, and Stanislav Rabinovich. 2015. “Optimal unemployment insurance in an equilibrium business-cycle model.” Journal of Monetary Economics, 71: 99–118.

Moffitt, Robert. 1983. “An economic model of welfare stigma.” The American Economic Review, 73(5): 1023–1035.

Mukoyama, Toshihiko. 2013. “Understanding the welfare effects of unemployment insurance policy in general equilibrium.” Journal of Macroeconomics, 38: 347–368.

Nakajima, Makoto. 2012. “A quantitative analysis of unemployment benefit extensions.” Journal of Monetary Economics, 59(7): 686–702.

Nichols, Albert L., and Richard J. Zeckhauser. 1982. “Targeting Transfers through Restrictions on Recipients.” The American Economic Review, 72(2): 372–377. Publisher: American Economic Association.

Piguillem, Facundo, Hernán Ruffo, and Nicholas Trachter. 2023. “Unemployment Insurance when the Wealth Distribution Matters.” "Federal Reserve Bank of Richmond" Working Paper 23-8.

Popp, Aaron. 2017. “Unemployment insurance in a three-state model of the labor market.” Journal of Monetary Economics, 90: 142–157.

Rendahl, Pontus. 2012. “Asset-Based Unemployment Insurance*.” International Economic Review, 53(3): 743–770. _eprint: https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1468- 2354.2012.00699.x.

Schmieder, Johannes F., Till Von Wachter, and Stefan Bender. 2016. “The Effect of Unemployment Benefits and Nonemployment Durations on Wages.” American Economic Review, 106(3): 739–777.

Setty, Ofer, and Yaniv Yedid-Levi. 2021. “On the Provision of Unemployment Insurance when Workers are Ex-Ante Heterogeneous.” Journal of the European Economic Association, 19(1): 664–706.

Shimer, Robert, and Ivan Werning. 2008. “Liquidity and Insurance for the Unemployed.” American Economic Review, 98(5): 1922–1942.

Tatsiramos, Konstantinos, and Jan C. Van Ours. 2014. “Labor Market Effects of Unemployment Insurance Design.” Journal of Economic Surveys, 28(2): 284–311.

Tempelman, Caren, and Aenneli Houkes-Hommes. 2016. “What Stops Dutch Households from Taking Up Much Needed Benefits?” Review of Income and Wealth, 62(4): 685–705.

US Federal Reserve Board. 2020. “Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances.” Federal Reserve Bulletin, 106: 1–42.

Young, Eric R. 2004. “Unemployment insurance and capital accumulation.” Journal of Monetary Economics, 51(8): 1683–1710.