Ex-ante Moral Hazard of Unemployment Insurance

Artur Henrique da Silva Santos, Maurício Soares Bugarin and Paulo Roberto Amorim Loureiro

Unemployment insurance aims to maintain workers’ consumption while they are unemployed, but may have undesirable effects on the beneficiaries’ labor supply. Theoretical and empirical studies have provided robust evidence of a reduction in the job search effort and an increase in the duration of unemployment, i.e., ex-post moral hazard. By contrast, this paper analyzes the influence of unemployment insurance on the behavior of workers while employed, i.e., ex-ante moral hazard. We use regression kink design and differences-in-differences to estimate the higher probability of termination after workers’ ensure eligibility for the benefit, and after increases in the potential duration of unemployment insurance by one month. Additionally, this paper analyzes the interaction of business cycles with ex-ante moral hazard. Contrary to what one would expect, the probability of termination has a procyclical behavior. The insurance is more widely used in periods of economic expansion than in recessions. According to the theoretical model, this occurs because, in expansion, it is easier to move out of unemployment after the insurance payout, whereas in recession, heading back to the job market is more challenging and, consequently, ex-ante moral hazard is less likely.

Keywords: unemployment insurance; ex-ante moral hazard; regression kink design; nonparametric.

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