Unemployment insurance and economic welfare

This paper reviews the literature on the effects of unemployment insurance (UI) on economic welfare. UI is generally considered to increase economic welfare by providing insurance to jobseekers, but also entails a fiscal cost, due to the direct cost of benefits as well as fiscal externalities. These externalities arise when UI induces behavioural responses that affect aggregate employment and productivity, thereby altering benefit expenditures and tax revenues. The paper reviews evidence on the behavioural responses of jobseekers related to job search effort and job acceptance criteria and discusses their implications for unemployment duration and job quality. It also examines evidence on spillover effects – including demand stabilisation, competition for jobs, and firms' hiring and separation decisions. Finally, the paper discusses evidence on the optimal design of UI by balancing its insurance value against its net fiscal cost, and identifies key gaps in the existing evidence base.