Unemployment Insurance Fraud and Optimal Monitoring

Abstract

An important incentive problem for the design of unemployment insurance is the fraudulent collection of unemployment benefits by workers who are gainfully employed. We show how to efficiently use a combination of tax/subsidy and monitoring to prevent such fraud. The optimal policy monitors the unemployed at fixed intervals. Employment tax is nonmonotonic: it increases between verifications but decreases after a verification. Unemployment benefits are relatively flat between verifications but decrease sharply after a verification. Our quantitative analysis suggests that the optimal monitoring cost is 60 percent of the cost in the current US system. (JEL D82, H24, J64, J65)

Optimal unemployment insurance with monitoring

“…Fuller, Ravikumar, and Zhang () studied concealed earnings, that is, the earnings amassed an unemployed worker becomes employed and still continues to collect benefits. They show that in the optimal contract, the planner monitors the worker at fixed intervals.…”

Unemployment Insurance and Labor Turnover: Evidence From Brazil

“…This paper sheds light on the role of UI as a determinant of worker turnover by developing a framework where workers may quit their jobs in 1 Carvalho et al, 2018 andDoornik et al, 2018 exploit an unanticipated change in the Brazilian UI program eligibility criteria implemented in 2015. They use diff-in-diff to estimate the effect of eligibility for UI on the probability of unjustified dismissal using the same data source over similar sample periods [Carvalho et al, 2018uses 2012-2015and Doornik et al, 2018uses 2013-2015. Though Carvalho et al, 2018 use a 10% random sample of workers, the results are quite similar, .55-.65pp increase in layoff probability, both consistent with strategic unemployment.…”

“…The influence on job search effort and on reservation wages are examples of what has long dominated the literature (Fredriksson and Holmlund, 2006;Tatsiramos and van Ours, 2014;Schmieder and von Wachter, 2016). More recently, though, some papers have contributed by enlightening the effects of UI on unemployment inflow (Wang and Williamson, 2002;Light and Omori, 2004;Zhang and Faig, 2012;Fuller et al, 2015;Zhang and Pan, 2017;Zweimüller, 2018), but, to my knowledge, FSHC accumulation has not been addressed yet.…”

“…4 Adding to the list of works that document increases in separation hazard due to UI eligibility, Christofides andMcKenna, 1996 andBaker andRea, 1998 study different changes in the minimum number of weeks worked required to collect UI benefits in Canada, the former in 1986-87 and the latter in 1990, and both conclude that separation is significantly more likely after UI eligibility is met. Also, papers like Fuller et al, 2015 andDoornik et al, 2018 regarding frauds in the UI system make more appealing the reading of these evidence as not a consequence solely of firms behavior. Further evidence on workers behavior responding to the incentives on UI system is provided in the next section by showing the relation of the hazard function to the replacement ratio.…”

“…These simulations, known as fake layoff agreements, exist in the economy as a result of the labor market institutions design and outweigh shirking as a successful exit strategy from employment relations 8 . They have been extensively studied in Brazil 9 and are possibly not exclusively relevant to the local labor market (e.g., Fuller et al, 2015 calculates that quits represented 13.9% of fraud overpayments in the United States UI system in 2007).…”