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Financial Economics

Policy Study

The Effect of Changes in Unemployment Insurance Policies on Labor Markets in Korea

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  • Author KIM. Jiwoon
  • Date 2016/12/31
  • Series No. Policy Study 2016-12
  • Language Korean
SUMMARY This study analyzes the impact of the comprehensive changes in unemployment insurance policies on the labor market and social welfare based on the overlapping generation model, which appropriately reflects both the details of Korean unemployment insurance system and the heterogeneity of the unemployed in Korea. First, the empirical analysis shows that a 10%p increase in the wage replacement rate reduces the fall in the annual consumption by 4.0%p. The consumption smoothing effect of unemployment insurance was concentrated on the unemployed over 50 years old and the unemployed with net debts. This empirical result suggests that it is necessary to explicitly consider the heterogeneity of the unemployed in terms of both age and net assets when analyzing the effects of the unemployment insurance system. Second, we examines the effect of the comprehensive changes in unemployment insurance policies by using the calibrated overlapping generation model. The comprehensive policy changes, including strengthening contribution requirements, reducing lower limits of benefits, raising upper limits of benefits, increasing wage replacement rates, and extending maximum benefit durations, decrease the employment rate of the 20~64 age group by 0.06%p and reduce the overall social welfare. The decrease in social welfare was mainly caused by lowering the lower limit of benefits. As a way to improve the social welfare, the upper limit should be increased to 50,000 won and the maximum benefit duration should be extended by one month while maintaining the contribution requirement, the lower limit, and the wage replacement rate to the current level.
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