Unemployment Insurance Take-Up Decision with Search and Application Frictions: Evidence from the Pandemic Unemployment Assistance

Using state-level ETA reposts from the department of labor, I found that while only 50% of eligible unemployed apply, around 20% of the unemployment insurance (UI) applicants are denied. This observation is facilitated by application frictions caused by the monetary and non-monetary eligibility requirements. In this paper, I develop an equilibrium directed search model that can explain this empirical finding with workers’ application decisions, application friction resulting from monetary and non-monetary eligibility requirements, workers’ ability to self-insure, UI benefit structure, and workers’ employment expectation, in a frictional labor market setting. With the model, I first show that this model is capable of replicating key pre-pandemic labor market moments pre-pandemic. I then quantify the welfare cost of application friction by doing counterfactual analysis and find that 70% of the welfare cost is due to the existence of the monetary eligibility requirement. Next, I show that, given the same amount of UI spending amount, relaxing the monetary eligibility threshold is able to increase UI take-up rate four times than the latter two, and low earners contribute the most. Lastly, I show that the model is also capable of replicating key labor market moments during pandemics (March 2020 to March 2021). Then, using the model, I first evaluate the performance of the Pandemic Unemployment Assistance Extension Program (PUA) among all other UI policies reforms, including the Federal Pandemic Unemployment Compensation (FPUC), and the Pandemic Emergency Unemployment Compensation (PEUC) within the Coronavirus Aid, Relief, and Economics Security (CARES) Act. I found that PUA is the most crucial extension during the pandemic.