Overview

High unemployment risk can be due to low productivity or high outside options to employment (such as high unemployment benefits). I show in a theoretical setting that the determinant of unemployment risk matters for the cost of unemployment and optimal social security (exemplified in unemployment insurance). In Denmark, unemployment risk is very heterogeneous in the cross section: 15% of the Danish labor force – “marginal workers” – account for 60% of unemployment. Using administrative records, I provide evidence suggesting that marginal workers differ from the majority of the population by both having worse outside options and being less productive. Preliminary: the calibrated model – which is work in progress – suggests an increase in unemployment insurance relative to the status quo.