Three Essays On Unemployment Self Selection And Wage Differentials

(Cont.) The government's capacity to insure workers is limited by the market wage setting, which gives workers a share in the employment surplus. When the government provides higher unemployment benefits, the bargained wages increase, and unemployment rises. These equilibrium responses have a negative effect on workers' welfare if workers' bargaining power is above a certain point, which is lower than the matching elasticity. As risk aversion increases, workers' share in the wage bargain is smaller, and thus the equilibrium effects are attenuated. The constrained optimal provision of unemployment benefits is a modification of the Hosios condition for efficient unemployment insurance and highlights the roles of bargaining and risk aversion. The optimal level of insurance increases with risk aversion, with the costs of creating a vacancy and with workers' higher bargaining power.