How Unemployment Benefits Boost Growth - Nominal News

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How Unemployment Benefits Boost Growth<br>It might sound counter-intuitive, but the presence of unemployment benefits encourage taking more risks with your next job.

Nominal News<br>Aug 18, 2026

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Changing jobs can be both exciting and scary. As I am currently in that process, I have definitely already experienced both feelings. Financial security is always on one’s mind and I am fortunate to have some, as it allows me to explore going full time on Nominal News.<br>Governments provide the public such financial security through unemployment insurance (UI). It turns out also that UI can be an important factor driving economic growth as shown in a recent paper by Clymo, Denderski Mercan and Schoefer (2026) (“CDMS ”).

Photo by Michael Benz on Unsplash<br>What You’ll Discover Today:<br>How unemployment insurance encourages job creation;

How unemployment insurance also boosts productivity;

Why we may need to consider unemployment insurance expansion in recessions.

Excessive Caution

An employed individual may naturally be worried about switching jobs. Going to a new job comes with inherent risks, one of which is what if the new job doesn’t work out and ends up terminating you. Faced with this uncertain risk of termination at a new job, a worker may be less inclined to switch jobs. This excessive, yet reasonable, caution can lead to worse outcomes for all.<br>UI may help with alleviating some of this risk. How?<br>Unemployment Insurance<br>To model the impact of UI, the authors, CDMS, assume a job is defined by two characteristics:<br>how productive is it (for example, how much revenue it will generate)

what is the likelihood the job will be terminated (e.g. how likely is the company to survive)

The wage a worker will receive is a function of these two things.1<br>The worker can decide whether to accept a job offer or not. If the worker accepts the offer, they receive a wage; if not, they receive UI.<br>Whilst on the job, the worker can receive job offers from other firms as well. As before, the job offer they get is described by the productivity level and job security level.<br>Intuition<br>It is intuitive that a worker can be indifferent between two jobs – one job that offers higher wages but lower job security is of equivalent value to a job that offers lower wages but higher job security.<br>Since the biggest worry for a person taking a higher risk job is becoming unemployed, UI can help mitigate this fear by providing a worker with some money in case they do become unemployed. The higher the UI, the more likely a worker should be willing to take a riskier job.<br>CDMS formally analyzed this with a survey2 to elicit how people view the wage vs security trade off. In this survey. CDMS found that:<br>for a 1 percentage point higher probability of job loss, workers on average demand 1.63% higher wage ;

For an identical 1 percentage point higher probability of job loss, workers in higher paying jobs require a 1.9% wage increase compared to workers in lower paying jobs, who only require a 1.3% wage increase;

For an identical 1 percentage point higher probability of job loss, workers in safer jobs require a 2.1% increase in wage increase compared to workers in riskier jobs who only require a 0.96% wage increase.

Consumption and Saving<br>Lastly, as is classic with most economic models, the worker chooses how much to consume each period and how much to save. Saving acts as a basic form of self-insurance from unemployment.<br>The CDMS model distills the world into a simple yet reasonable reflection of the world, as workers:<br>Make a trade off between wages and job security;

Consume or save.

Job Creation

The really interesting element of the CDMS model is that the decisions workers make also influence job creation. If workers are unlikely to switch jobs, firms are less likely to form and post job offers (posting a job entails a cost), as they are less likely to find a worker willing to join them.<br>At the same time, with higher unemployment insurance, workers are also less likely to accept jobs, again discouraging firms from posting jobs. This implies that there is an optimal level of UI, as both effects need to be balanced.<br>Bringing in Data

As the last step, CDMS calibrated the model to US data. In the US, unemployment insurance typically replaces around 40% of an unemployed person’s previous wage (this is called the replacement rate).<br>CDMS ran a counterfactual...