Voluntary Unemployment Insurance

In countries with voluntary unemployment insurance, some workers are not insured against the risk of unemployment. This paper set-up a novel theoretical model in order to examine the impact on welfare and inequality when unemployment insurance is not obligatory but instead an individual decision. Workers are heterogeneous in terms of initial wealth, which affects the social assistance they can get. The higher the worker’s wealth level, the lower social assistance in case of unemployment, which therefore increases the incentive to obtain unemployment insurance. We consider an economy inhabited by risk averse workers and then expand the model to include educational choice. We analyse the mechanisms by which a higher social assistance and unemployment insurance for educated and uneducated workers impact unemployment, wages, education, inequality and welfare. We examine the choice of social security system considering different policy goals. An important one being to reduce inequality