Unemployment insurance benefits and the supply of labor of an employed worker

The unemployment insurance program is believed to adversely affect the supply of labor of the unemployed. Yet, it generates favorable incentives for the employed. Since unemployment benefits are aimed to compensate the unemployed for earnings loss, of which past earnings serve as a practical measure, a worker might choose to increase his efforts when employed, insuring himself partially against future unemployment. However, this possible impact on labor supply has escaped any attention until very recently. Incorporating an earnings-related benefits scheme into a multi-period decision model, the present paper investigates the labor supply behavior of an insured worker over time.