Administrative Expenses and Optimal Unemployment Insurance

• In Event: Social Insurance

Abstract

Popular models of optimal unemployment insurance (UI) implicitly assume that UI programs have no administrative expenses, i.e., one dollar of additional tax revenue translates to one dollar of additional benefit payments. If administrative expenses are not negligible, however, these models would overestimate the optimal level of UI generosity. This paper evaluates the impact of UI administrative expenses on the optimal UI benefits and duration. First, I incorporate administrative expenses into the two standard formulas used to evaluate the UI system: the Baily-Chetty formula and the Marginal Value of Public Funds. Second, using accounting data from state workforce agencies, I estimate the (variable) administrative expenses of the UI program. Incorporating these estimates into the updated formulas, I find that administrative expenses can meaningfully alter the optimal levels and fiscal costs of UI benefits and potential benefit duration.

Author

• Nathaniel Pattison, Southern Methodist University