DP18526 The Great Resignation and Optimal Unemployment Insurance
How generous should social insurance be when quits account for a large share of transitions into non-employment? We address this question using a multi-sector directed search model extended to incorporate endogenous quits both to other jobs and to non-employment. Workers quit too often in the competitive equilibrium, and private markets co-ordinate on excessively high “efficiency” wages. Quantitatively, we find that unemployment insurance is optimally much less generous in an economy with quits than in one without. An extended Baily-Chetty formula is derived to illustrate the source of this difference.