WELFARE EFFECTS OF INTEGRATED SOCIAL INSURANCE SYSTEM

Abstract

This paper explores the optimal social insurance system against unemployment both theoretically and empirically. Using a simple theoretical framework we show that unemployment insurance provides insurance against unemployment risk and enhances distributional equity, whereas self-insurance through borrowings promotes intertemporal consumption smoo¬thing and maintains incentives of individuals. Then we use Korean and U.S. panel data sets to simulate the welfare effects of various insurance systems. Simulation results demonstrate that the intertemporal income smoothing effect of self-insurance is fairly strong: even for a small degree of moral hazard associated with UI, increasing the portion of self-insurance improves social welfare. This continues to hold even when the government provides some retirement subsidy to poor individuals unless the moral hazard created by government policies is very serious. We also discuss some interesting differences between Korean data-based analysis and U.S. data-based analysis.