Unemployment Insurance Reforms in a Search Model With Endogenous Labor Force Participation

This paper develops a life-cycle search model with a labor force participation decision of workers, job-to-job transitions and endogenous job creation to study unemployment insurance (UI) reforms. The calibrated model replicates the aggregate and life-cycle patterns of labor market flows from the Current Population Survey, as well as the worker labor market histories over four months. The model predicts that an UI extension to 99 weeks leads to a slight decrease in labor productivity, the employment to population ratio and the labor force participation rate, but to a non-trivial increase in the unemployment rate. An equally expensive increase in UI benefits, holding the eligibility duration unchanged, yields a smaller increase in the unemployment rate and a smaller decrease in the labor force participation rate. We show that disregarding the effect of flows in and out of the labor force and job-to-job transitions would significantly bias the response of the unemployment rate and labor productivity to UI reforms.