Optimal life cycle unemployment insurance

It seems we should index unemployment benefits to a person’s age.  For the liquidity-constrained, human capital-investing young, we don’t want to rush them into unsuitable jobs.  The older workers — that’s another matter.   Michelacci and Ruffo report:

We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers.

The AER version is here.  Ungated versions are here.  Elsewhere Ben Casselman considers some ways that unemployment has changed, and what that may mean for benefits.

Comments

Older people may have more skills but once you are over 50 it's gets ever more difficult to get a job. Nobody will say it but your age is a big negative factor.

Maybe I'm misunderstanding something, since other people make your point below, but isn't this a reason to reduce unemployment benefits for the old? You want to encourage them to settle and get reemployed, even if it means a step down. You want them to get over whatever sense of entitlement they have as soon as possible. If the problem is partially caused by irrational (or for that matter rational) age discrimination, I'm not sure that matters. You still want to solve the problem.

You mean that its a social good to force older people to settle for low wage no benefit jobs, spending down savings including retirement savings in futile attempts to save their house, then default on their mortgage and be foreclosed on or forced into a short sale losing all or most of their equity, and then ensure that they are qualified for any housing subsidies, apply for Social Security benefits early to supplement their low wage income, and drop insurance so they will go on Medicare with untreated chronic illnesses, and by age 67 are fully qualified for Social Security, Medicare, Medicaid, and SSI as old people with low income and zero assets?

Young adults have no assets like housing to tie them down, have no kids to support, have high mobility and plenty of time to explore by joining the Peace Corp or Vista or other programs which provide low cost housing and medical benefits by arranging group living support with stipends, and provide as added benefits aid for college or trade school - civilian programs with similar costs and benefits to military service. These programs provide the framework for building relationships which are useful in setting up a business or managing employees or cold calling customers. And by picking opportunities in new places, you get to explore new regions of the world.

While these programs provide opportunity for older people, they do not have places for families, and the opportunities for couples are limited.

Yes, and make Social Security means-based. Old people have money.

Why not make the unemployment means based as well, rather than simply decreasing it for older people?

That's actually a reasonable idea. Though presumably you'd have to do something to shore up the system after you remove their subsidy to low earners. I've wondered to what extent government unemployment insurance has crowded out private insurance. If you talk to a lot of middle income people, they view things like home equity, credit, and savings as unemployment insurance, supplementing the relatively small government benefit. But those resources are also at risk in the kind of systematic events that affect employment.

It is means based. People who made much more get proportionately much less

High earners also pay taxes on 85% of Social Security benefits- no taxes for low-earners.

"Yes, and make Social Security means-based. Old people have money."

Right out of the free lunch economics playbook.

Where is your evidence that Social Security is not means tested in at least three different ways:
1) low incomes get proportionately higher benefits to middle incomes and high incomes and non-labor incomes get drastically lower benefits that middle incomes
2) retired people with lots of other income pay taxes on most of their Social Security benefits which if you count the SS benefits as the marginal income is taxed at the highest tax rates of all
3) capital gains in IRA/40xK retirement accounts are taxed as labor income tax rates not the lower cap gains rates
4) Medicare premiums are set based on income, with high retirement income people paying 100% of Part B, plus they are paying an Obamacare tax on all income from any source in excess of a cut off, which for someone like Warren Buffett means his FICA and its Obamacare upgrade taxes are probably far more than five times as high as his Social Security and Medicare Part A benefit costs to taxpayers.

By the way, care to point to the evidence that older people, say 55 and up, have more money in real terms today (after all the tax favored ways to accumulate money that have been made available to them since 1980) than the 55 and up prior to 1980?

I don't remember any of my friends looking for a job when they were collecting unemployment insurance. I sure didn't. It was stressful, too, because there was always the chance you could get audited and have to show a log of your job search.

It seems to me that young people A. are at a prime age for playing video games, working on a screenplay, practicing guitar, and doing other fun things while unemployed; B. pay a much lower social cost for being broke; C. don't have families to care for; D. have crappy job prospects despite our supposed high-return human capital; and E. believe our high-earning days are ahead of us rather than worrying a prolonged unemployment could doom us to bagging groceries in our golden years.

When I was unemployed in my 20s, I kept up the job search, but I was pretty chill about it. UI completely covered my young-and-single living expenses. I got a job right around the expiration period, but this was largely coincidental as the perfect job for me appeared at that time.

When I was unemployed in my 30s, I ended up never claiming UI because of the tougher standards (including annoying waiting periods that actually encouraged things that burning off my vacation time), but also because I did consulting work. I was then the breadwinner for a family of four so it was more concerning.

I more in line with what Dan did as far as UI, its much easier to chill when you don't have a family or other major responsibilities. Don't know why Kevin didn't do the job search its only two per week, and if you really wanted to you could just apply to jobs where they never would hire you. I actually am applying to jobs that I am qualified for (some of which I know I won't get but still realistic) and UI does provide a small (359 a week) benefit that helps with not settling for a 30 percent paycut taking the first job that pops up

Hi Ray

I live in Australia. I don't know the US system but here it's all the same benefit. I don't receive it and hope not too. I've gone from senior manager level down to driving trucks. If you change jobs over 50 you better make sure that it's a good decision. That said I will read the paper and think about it. My personal experience says otherwise. perhaps it would be better to means test benefits rather than use age as a determining basis.

It isn't "unemployment insurance", it's rent, mortgage payment, car payment, phone bill, electricity insurance. Since those creditors have their hooks deeper into the younger generation they might be interested in a modification of the program in that direction. They're the ones that end up with the bulk of it anyway. Also liquor stores.

Sounds like a terrible idea... For people older than 50 finding a job is quite difficult, while for young people is relatively easy. Older people shouldnt have higher benefits either (though since they are based on past salary? they will be higher anyway), but they should last for a longer period than for younger people...

"From each according to his abilities, to each according to his needs" (Marx). Or this one: "and distribution was made unto every man according as he had need" (from Acts in the Christian Bible). I suppose the young have greater need in times of economic distress, so why not follow the admonitions of Marx and Jesus. Of course, Marx, Jesus, and the authors of this study are promoting means-testing of public benefits. "First they came for the Socialists, and I did not speak out - Because I was not a Socialist. . . . Then they came for me - and there was no one left to speak for me." Okay, a tad dramatic. But it makes my point: First they came for unemployment benefits, and I did not speak out - Because I was employed. . . . Then they came for my social security and Medicare benefits - and there was no one left to speak for me.

Some people jump out of airplanes for entertainment. Nevertheless it is not nice to push someone out of an airplane.

In a similar way, Marx and Jesus were not the same.

Shhh.... Please do not encourage nuanced analysis!

Right, you let people make sensible reforms to parts of the welfare state, pretty soon they'll start making reforms you don't think are so sensible.

Marty Feldstein championed a closely related idea decades ago.

http://www.nber.org/papers/w6860

I once had a 10% rolling savings idea. Instead of unemployment everyone is required to bank 10% of their pay into a 401K type fund with the funds available after 5 years. There would be no requirement that you be unemployed to tap them, but obviously those who have longer periods of work are likely to amass a larger fund than those who don't.

I think Bush proposed something similar in the form of a universal savings account that attempted to consolidate the alphabet soup of 529, IRA, 401(k), 403(b), HCSA, etc. I don't think it got a lot of traction. I've thought about a similar plan for healthcare, implemented by getting rid of some of the sillier restrictions on HCSAs.

The problem with saving instead of insurance is that you probably need to backstop the savings with insurance, and then you wind up maintaining both programs. But maybe it's a better solution. Insurance has all sorts of crazy effects that go away when you're spending your own money.

It is akin to FGTS in Brazil, a fund where a fraction of the worker's wages are deposited by the employer (ultimately, the worker pays, since it is a cost and influences how much the boss is willing to pay him). The difference is that it is a government-managed fund, the interest rates are low and the money is invested in government projects (so basically cheap money for the government).

Correction: "a fraction of (...) IS deposited..."

"For the liquidity-constrained, human capital-investing young, we don’t want to rush them into unsuitable jobs."

That sounds reasonable enough, but isn't the danger that this approach can lead to this kind of thing -- young people 'investing' primarily in delaying real life as long as possiblealong with a lack of seriousness about which educational investments will actually pay off:

http://www.businessinsider.com/free-universities-and-no-student-loan-debt-is-hurting-denmarks-economy-2014-6

Sounds like a great way to boost the market for video games, craft beer, and legal marijuana.

The gerontocrats will never let it happen.

I don't know if I buy that the "moral hazard is mild". I had some friends growing up that would have been happy to take unemployment, smoke pot and play video games. Those same friends are more serious about life in their 30's than in their 20's.

But this is already true. UE is capped at a low level while the old make more than the young so while it provides slightly more nominally, it provides less relatively, so the question is whether to do even more/less. This would be more effective at driving the old out of the workforce rapidly.

This sounds like a great way to get some older workers to stay attached to the workforce--and others to flee to disability even harder. An older worker who is unemployed because their skills have become obsolete isn't really a candidate for "consumption smoothing over the business cycle." For them, unemployment insurance gives them a few more months of not working for 1/3 what they used to make as a greeter at a big box store. Maybe taking this away is indeed "welfare enhancing" but there is more to the story than moral hazard (which is certainly part of the story).

As a person in favor of eliminating tenure and replacing it with 5 year performance contracts, or civil service protection,

I agree with Tyler that with respect to unemployment insurance for academics who don't get renewed or who are dismissed because of economic circumstances that

"The older workers--that's another matter."

Do you think we could have a vote at the American Economics Association convention on the drop tenure and lower older worker unemployment insurance proposal.

Do I hear a second?

There are a number of different issues here that need some adult discussion.

1. Family formation is occurring at a later age. A 55 year old may still have a kid in high school or in college.

2. For professionals, a gap in a resume motivates more than the opportunity to draw Unemployment insurance. Lower skilled workers, at any age, have difficulties in job placement during a recession, and decreasing UI for any age group within this population, will have long lasting effects given the overall low level of savings.

3. So, now we are left with the middle class...a family with a house, some kids, living in a neighborhood. Do you honestly believe that this group is going to willingly hang out because of UI? The social pressure alone would motivate.

Unemployment payment actually are already adjusted for age for all practical purposes.

Unemployment benefits are based on an individuals earnings over the last year.

But individual earnings are heavily influenced by age and if you look at average wages by age you see a steady progression until the average age is in the 50s.

Nothing like a little analysis to ruin a perfectly good theory.

BUT unemployment benefits are also subject to a rather low cap, so high (even medium, really) earners will receive a much lower percentage of their former earnings.

But the cap would still be in place so this would still work about the same under both approaches.

One calculation here is political rather than economic: if unemployment benefits are means-tested there will be less political support for them, as those who do not qualify for them will be less likely to support them.

A possible reform: Start benefits at a higher level and then gradually reduce them over time (instead of maintaining a constant level benefit with abrupt cutoff) to encourage earlier job searches?

Another: Permit recipient to re-establish benefits if new job is lost before benefits would have expired, had the recipient not accepted the new job?

Another: Does it make sense to offer larger benefits to those whose previous job was of long duration?

Younger people often have the option of moving home and living rent free-- that's seldom an option once you reach your 40s let alone your 50s. And for crying out loud older people (30s and 40s) may have children to support too.
Also, shouldn't we want young people to get into the work force and begin building experience rather than have the option of sitting out until the perfect job comes along? They may well something they end up loving that they never considered before (an example would be Megan McArdle who never considered becoming a professional blogger but had to do something when her joblessness dragged on the recession 2001)

More evidence that the grasshoppers are winning, at least until the ants run out of food.

One of the most important parts of human capital is work ethic. If young people start their adult lives on the dole, what happens to their work ethic? With oldsters, that die is already cast.

Interesting. If an argument in favour of high benefits is that people can find suitable employment, then indeed, what does it matter if a 60-year takes a not that decent job.

However, the 60-year old is the one with 30+ year experience. Why waste that serving coffee. The youth will learn their way up the ladder if they are so inclined.

I'm of two sides on this argument, but it's very interesting, and more than a bit relevant.

My guess is that administrative simplicity and senses of inequality would prevent its application in the suggested sense, but perhaps there is a way to untangle the opposing arguments to figure out what would be optimal.

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