Essays on Labor Economics and Unemployment Insurance

This dissertation consists of two essays that study the efficiency gains from profiling of jobless workers who are recipients of unemployment insurance benefits. In the first essay, I study how profiling determines an optimal criterion of referral of recipients to reemployment services. In the second essay, I study how profiling eases the problem of incentive provision to workers who are found highly re-employable, by lowering their future promised utility. In the first chapter, a risk-neutral government, who provides risk-averse unemployed workers with welfare support, finds it optimal to match workers with active or passive labor-market policies, based on workers' human capital. However, when human capital is subject to two-sided uncertainty, the government can decide either to detect it via profiling, or to form expectations about it and match workers and policies accordingly. The paper delivers two findings. First, the government's return from worker's search is increasing and concave in expectations, due to hyperbolic decreasing incentive costs and linear increasing labor taxes upon reemployment. Second, the concavity of returns causes the value of information to be negative for high-end expectations, whenever the loss from putting low-skilled workers at rest outweighs the gain from lowering search incentives to high-skilled workers. If so, profiling should not fully detect human capital, but rather boost the expectations of a share of low-skilled workers and persuade them to search for re-employment at a lower incentive cost for the government. In the second chapter, efficient unemployment assistance is tailored to workers' human capital. Since human capital is difficult to infer, assistance is provided on the basis of its expected level. Alternatively, workers can be profiled and their actual level of human capital be detected. A profiling program establishes (i) whom to profile, (ii) at what stage of the program and (iii) what unemployment benefits to pay, according to the new information obtained. The paper identifies the determinants of optimal profiling along these three dimensions in a dynamic principal-agent framework with non-contractible effort and two-sided uncertainty about workers' human capital. There are two main findings. First, workers with higher expectations on human capital are incentivized to search for a job, thanks to larger returns on search effort. They are profiled only at a successive stage of the unemployment spell, once the savings from fine-tuning of benefits outweigh the cost of profiling. Second, since the cost of incentive provision is increasing in the generosity of benefits, profiling is used also to lower promised benefits to those workers who are requested to search after it.