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Unemployment and Workers' Compensation Programs: Rationale, Design, Labor Supply, and Income Support (WP-02-16)

Bruce D. Meyer

This paper examines the unemployment insurance (UI) and workers' compensation (WC) insurance programs. It concentrates on the labor supply, insurance, and income redistribution features of the programs. The paper also focuses on the American experience, though substantial sections cover the theoretical effects of UI and WC and the literature on other countries.

The empirical work on the labor supply effects of UI and WC finds that the programs increase the length of time employees spend out of work. Most of the estimates of the elasticities of lost work time that incorporate both the incidence and duration of claims are close to 1.0 for unemployment insurance and between 0.5 and 1.0 for workers' compensation. These elasticities are substantially larger than the labor supply elasticities typically found for men in studies of the effects of wages or taxes on hours of work. Part of the explanation for this difference is probably that UI and WC lead to short-run variation in wages with mostly a substitution effect and that the programs alter the work participation margin.

The empirical work on the insurance value and redistributive aspects of UI and WC is much less developed. There is some good evidence that UI smooths the consumption of the unemployed, but more work is needed to conclusively establish its role. The extent of redistribution through UI has been more clearly established, but the literature is short. There is substantial evidence that workers injured on the job suffer material hardships even with WC programs, but an overall picture of the insurance and redistributive aspects of WC has not been provided.
Bruce D. Meyer, Department of Economics, Northwestern University

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