Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2011:4: Part-Time Unemployment and Optimal Unemployment Insurance

Susanne Ek () and Bertil Holmlund
Additional contact information
Susanne Ek: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Bertil Holmlund: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: A significant fraction of the labor force consists of employed workers who are part-time unemployed (underemployed) in the sense that they are unable to work as much as they prefer. This paper develops a search and matching model to study the design of optimal unemployment insurance in an economy with unemployment as well as part-time unemployment. Part-time unemployment provides income insurance and serves as a stepping stone to full-time jobs. Unemployment benefits for part-timers increase the outflow from unemployment to part-time work but reduce the outflow from part-time work to fulltime employment. We examine the optimal structure of benefits for unemployed and underemployed workers. The results indicate nonnegligible welfare gains associated with time limits for unemployment benefits as well as for part-time benefits. The welfare gains from optimal UI are larger when wages are fixed than when they are flexible.

Keywords: Job search; part-time unemployment; unemployment insurance

JEL-codes: J64; J65

36 pages, February 28, 2011

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