Abstract:

Denmark is one of the few countries where unemployment insurance (UI) is voluntary. Despite substantial state subsidies, a significant share of workers remain uninsured. We leverage this unique institutional setting to assess the welfare implications of UI in the presence of moral hazard and adverse selection.

To do so, we develop a heterogeneous-agent job search model in which workers can voluntarily enroll in a government-provided UI scheme. In addition to UI, workers can self-insure through precautionary savings and, while unemployed, by adjusting their search effort. The model is calibrated to Danish labor market data to capture key dimensions of worker heterogeneity.

We find that mandating UI improves aggregate welfare, though the effects are heterogeneous across individuals.