Discussion paper

DP13624 The Value of Unemployment Insurance

In the absence of unemployment insurance (UI) choices, the standard approach to estimating
the value of UI is to infer it from the observed consumption response to job loss in combination
with some assumption on preferences. Exploiting the unique data and policy context in
Sweden, we propose two alternative approaches, which we implement and compare to the standard
consumption-based approach on the exact same sample of workers. We nd that the
drop in consumption expenditures upon job loss is relatively small ( 13 percent), but the
marginal propensity to consume (MPC), estimated using variation in local government transfers,
is around 25 percent higher when unemployed than when employed. We show that this
wedge in MPCs, the focus of our rst approach, reveals a high relative price of smoothing consumption,
con rmed by direct evidence on the limited consumption smoothing means available
during unemployment. The estimated relative price provides a lower-bound on the value of UI,
which turns out to be substantially higher than the consumption-based estimate under standard
preference assumptions. Exploiting the UI choices embedded in the Swedish UI system, we also
propose a Revealed-Preference approach, which con rms that the average value of UI is large
in our setting, but also reveals substantial dispersion in the value of UI, above and beyond the
variation in consumption drops.

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Citation

Landais, C and J Spinnewijn (eds) (2019), “DP13624 The Value of Unemployment Insurance”, CEPR Press Discussion Paper No. 13624. https://cepr.org/publications/dp13624