A Study On The Optimization Of Unemployment Insurance

Unemployment insurance program is a practical and operational social institution, which is supposed to be insurance against the misfortune of becoming unemployed for each individual. Changes in the program have a direct influence on individuals' decision-making, and then affect the whole economy. Five questions are needed to be considered:(1) Why can unemployment insurance affect individuals' actions?(2) How does unemployment insurance affect macroeconomic?(3) What effect does unemployment insurance has on the individual and social welfare?(4) How can we make the balance between benefits and costs associated with unemployment insurance?(5) What kind of unemployment insurance program should be provided in the developing countries such as China?There is a great deal of literature discussing these issues. Correspondingly, different points of view about unemployment insurance come into being. However, up to now, few works give a clear and systematic summary. There are also few theoretical and empirical analyses on unemployment insurance program in China. Those are what the dissertation just wants to do!Unemployment insurance program affects individuals' labor supply and firms' labor demand, and then distorts the allocation of labor force in the economy. Lots of studies on unemployment insurance of developed countries indicate that the program do reduce work incentives, restrain demand for labor and threaten employment stability. For these reasons, unemployment insurance may increase the length of unemployment spell and the equilibrium rate of unemployment in the economy. However, as an instrument of income redistribution, unemployment insurance is a subsidy for the unemployed to smooth consumption and look for job across periods of unemployment, which is in favor of individual welfare. Some studies agree that the program can increase economic efficiency and social welfare. The balance between benefits and costs associated with unemployment insurance is the optimal level. Under varied constraint conditions, optimal unemployment insurance, which minimizes the cost of distortion and maximizes the welfare of all workers, can be achieved by modifying and adjusting the program. In recent years, China has begun to pay attention to unemployment insurance because of high rate of unemployment.Although China has a very different market environment from developed countries, these theories and empirical results help to improve unemployment insurance program in China.This dissertation is divided into seven chapters except the preface.Chapter 1 briefly summarizes unemployment insurance program across developed countries, including its origination, evolution, content and function. The main purpose of the summary is to introduce the problem about unemployment insurance and make foundation for further theoretic analysis in subsequent chapters. Unemployment is the loss of labor force resources. As a tool of income redistribution, unemployment insurance makes for efficiency and equity in the economy. Aspects of unemployment insurance, such as eligibility for benefits, the criterion and level of benefit, potential benefit duration, methods of financing and management system, are closely attached to the interests of individuals. Changes in them will directly alter people's decision-making. These provisions are focuses of analyzing unemployment insurance from theoretical perspective.From chapter 2 to chapter 5, the dissertation does researches in unemployment insurance. On one hand, generous unemployment insurance inclines to increase the spell of unemployment and overall unemployment rate; on the other hand, unemployment insurance is favorable to welfare and efficiency in the economy. Firstly, the author explores the causes of distortion generated by the program. Secondly, the author discusses the effect of the program on individual and social welfare. Lastly, the author brings two effects together, and discusses the optimal level of the program.Chapter 2 explores how unemployment insurance affects labor supply decided by individuals. For unemployment benefit compensates for unemployment, it increases people's reservation wage and reduces search effort by the unemployed. Consequently, it lengthens unemployment spell of the unemployed. If unemployment benefit is from taxes on employees' earnings, it will give birth to income effect and substitution effect for increasing non-labor income and reducing wage of workers. However, if there exit a fixed duration of benefit payments and eligibility requirement, the program will induce workers to exit actively from unemployment to employment for benefit entitlement. The entitlement effect makes it more attractive for non-eligible workers and unemployed workers who come close to benefit exhaustion. Then unemployment insurance will increase the labor supply of individuals.Chapter 3 is concerned with the effects of unemployment insurance on labordemand in the market. There are two different tax systems. One is a fixed payroll tax system; the other is experience rating system. Fixed payroll tax increases the marginal cost of labor and reduces the demand for labor. However, experience rating system makes employers' layoff behavior related to the marginal tax cost of laying off an additional worker. If the employer lays off more workers, more contributions he will pay for. Such mechanism restricts employers' laying off behavior. Different tax systems have different effects on demand for labor.Chapter4 discusses welfare effect of unemployment insurance. Unemployment insurance helps to smooth consumption for the unemployed, and then increases individual welfare. Moreover, the function of income redistribution will improve social welfare. As a subsidy for the unemployed to looking for suitable jobs, unemployment insurance improves the quality of matching between workers and job vacancies to increase output and efficiency.Chapter 5 focuses on the optimal level of unemployment insurance. The optimal level is the balance between benefits and costs associated unemployment insurance. The deep-seated causes of distortion costs are moral hazard and adverse selection resulting from asymmetric information. For the purpose of reducing and avoiding them, government should design appropriate provisions in unemployment insurance program, such as the level of benefits, finite potential duration of benefit, the benefit schedule and work test. Moreover, optimal unemployment insurance is not a universal rule applied to all circumstances. Factors including different liquidity constraints, capital market imperfection and substitution among workers will lead to varied optimal unemployment insurance program.Chapter 6 and Chapter 7 are the intention of the whole discussion. Theories and empirical results from unemployment insurance of developed countries make for establishing the program in developing countries. In the process of establishment, China should learn experience from developed countries and take particular market environment of developing countries into consideration.Chapter 6 discusses unemployment insurance program in China. Compared to unemployment in developed countries, there exists high unemployment rate and large numbers of underemployment workers. Unemployment insurance is provided not only to maintain standard of living for the unemployed, but also to make underemployment publicly. That is why unemployment insurance program plays an important role in the course of reforming economic system. It is obvious that unemployment insurance in China is lagged behind its economic development, however.Chapter 7 examines the problems raised by lagging unemployment insurance in China and puts forward the optimal design of it. Low level of the program has narrow scope to the labor supply of workers, just limited to those with low-level skill and income. Unemployment insurance will lengthen their unemployment duration. Fixed unemployment insurance payroll tax system lowers labor demand and reallocates labor force to firms of high unemployment risk. Furthermore, the function of consumption smoothing of the program is not obvious, let alone welfare and efficiency improvement. From these points of view, some expenditure on unemployment insurance may be wasteful of resources. Due to making good use of unemployment insurance fund, the program should be designed including two systems: one is unemployment insurance, which is designed to satisfy conditions of the optimal level, the other is unemployment assistance, which is to guarantee the interests of the long-term unemployed.