Life Cycle UI with ex-ante Heterogeneous Workers

The incentives to search for employment vary systematically over the life cycle and with idiosyncratic productivity. These variations should be accounted for when designing UI policy. Using a life cycle model with endogenous human capital accumulation and permanent differences in worker productivity, I assess the welfare implications from optimally setting effective UI replacement rates. Welfare gains are sizeable, both absolute and relative to the size of the program, amounting to up to 0.7% of consumption in all periods and states or roughly 30% of the size of the UI program. Moreover, I demonstrate that the entire gains from conditioning replacement rates on age only and about three quarters of the welfare gains from conditioning on age and productivity can be generated by a simple and robust implementation inspired by the current U.S. UI system, featuring only a constant replacement rate, a benefit floor, and a benefit cap.