Essays in unemployment insurance
Author(s)Brown, David Walton
Essays in UI
Massachusetts Institute of Technology. Dept. of Economics.
Jonathan Gruber and Amy Finkelstein.
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This thesis consists of three essays that examine household responses to state unemployment insurance (UI) generosity across spells of unemployment, with a particular emphasis on the role of liquidity constraints. Enacted in 1986, the Consolidated Omnibus Budget Reconciliation Act (COBRA) provides limited portability of employer-sponsored health insurance coverage amongst job separators. Separated workers are eligible to maintain their employer-sponsored health coverage at the point of separation for a period of typically 18 months, though are obligated to pay 102 percent of the full employer premium. The substantial cost to maintain continuation coverage relative to transitory income poses a potential barrier for the unemployed. Using Survey of Income and Program Participation (SIPP) panels spanning 1990-2003, Chapter One re-evaluates existing evidence of UI adequacy and the limited effectiveness of continuation of coverage mandates by assessing the role of UI in maintaining private health insurance coverage across employment status. I first establish the magnitude of the loss of private health insurance coverage associated with unemployment, separating the issue of duration dependence. I find that private coverage falls by approximately 19 percentage points, or 26 percent of pre-separation levels, across employment status. Exploiting plausibly exogenous spatial and temporal variation in UI generosity, I then employ a simulated instruments approach to estimate the effect of UI generosity on private health insurance coverage amongst the unemployed. I find that a 10 percentage points increase in the UI replacement rate increases private coverage amongst the unemployed by 3.0 percentage points, and that a $100 increase in weekly UI benefits increases private coverage amongst the unemployed by 7.6 percentage points. Although imprecise, these results imply that current UI generosity mitigates the loss of private health insurance coverage by roughly 41 to 44 percent. Stratification across proxies for liquidity constraint and consumption commitment reveals suggestive evidence of an associated liquidity effect. The policy response to shortfalls in insurance coverage for job separators has been to enact continuation of coverage mandates, which allow job leavers to continue their employer-sponsored coverage without the typical direct cost subsidization provided to active employees. For the unemployed, this cost is incurred during a period of low transitory income, suggesting a plausibly important role for liquidity constraints in limiting take-up of continuation benefits. Incorporating SIPP panels spanning 1983-2003, Chapter Two first evaluates the effectiveness of continuation of coverage mandates in mitigating the fall in private health insurance coverage across spells of unemployment, identified by variation in state mandates and implementation of mandated federal coverage through COBRA. These results imply that 12 months of continuation of coverage eligibility mitigates the fall in private coverage amongst the unemployed with employer-sponsored health coverage prior to separation by approximately 18 percent. Exploiting plausibly exogenous spatial and temporal variation in state UI benefits across the reference period, I then employ a simulated instruments approach to estimate the heterogeneous effect of continuation of coverage mandates across levels of transitory income. These results are consistent with the notion of excess sensitivity to cash-in-hand. Absent state UI, mandate eligibility mitigates only 6 percent of the fall in private coverage. Yet for every $100 in eligible weekly UI benefits, private coverage is increased for mandate-eligible separators by 10 percentage points relative to mandate-ineligible separators. Policy makers must comprehensively address both access to group insurance markets as well as ability to pay for constrained households. Chapter Three re-evaluates existing evidence of a spousal labor supply response to state UI generosity. Although Chetty (2008) documents an associated liquidity effect in the response of unemployment spell duration to UI generosity, there has been no comparable work investigating the importance of liquidity constraints in explaining the crowd-out of spousal labor supply by eligible UI benefits of the household's primary earner. Across such periods of low transitory income of the primary earner, the spousal labor supply of liquidity constrained households plausibly exhibits greater responsiveness to eligible UI benefits. Yet the spousal labor supply response to UI generosity is composed of both an indirect effect, driven by eligible UI benefits of the unemployed primary earner, and a direct effect, driven by own-eligibility of the spouse. The longitudinal nature of the SIPP allows for identification of UI-ineligible spouses, and corresponding sample restrictions purge estimates of the confounding direct effect of UI. Employing a simulated instruments approach that exploits variation within-states across the reference period 1983-2003, I find that each eligible dollar in UI benefits crowds-out spousal earnings by 33 cents across the unemployment spell of the household's primary earner. Despite the sizeable estimate of crowd-out, the predicted increase in spousal earnings absent UI would offset only 13 percent of the lost wages of the unemployed primary earner. Stratification across proxies for liquidity constraint and fixed consumption commitment yields suggestive evidence of an associated liquidity effect. In terms of average spousal earnings, couples proxied as liquidity unconstrained through consideration of net liquid wealth are only 26 percent as responsive to eligible UI benefits of the primary earner relative to couples proxied as liquidity constrained. These results rationalize of the large crowd-out estimates of Cullen and Gruber (2000).
Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2010.Cataloged from PDF version of thesis.Includes bibliographical references.
DepartmentMassachusetts Institute of Technology. Department of Economics
Massachusetts Institute of Technology