Can the Unemployed Borrow? Implications for Public Insurance
Abstract
Do the unemployed have access to credit markets? Yes. Do the unemployedborrow? Yes. We link administrative earnings records with credit reports
and show that individuals maintain significant access to credit following
job loss. Unconstrained workers who lose their jobs borrow, while
constrained workers who lose their jobs default and delever. Both
default and borrowing allow unemployed workers to boost consumption,
and they pay an interest rate premium to do so, i.e. the credit market
acts as a limited \emph{private} unemployment insurance market. We
show theoretically that long-term relationships and reputation concerns
allow credit markets to serve as a market for private unemployment
insurance despite adverse selection and asymmetric information about
\emph{future job loss}. We then ask, given the degree of credit access
households have, what is the optimal provision of public unemployment
insurance? We find that the optimal provision of public insurance
is unambiguously lower as credit access expands. The median individual
in our simulated economy would prefer to have the income replacement
rate from public unemployment insurance lowered from the current US
policy of 45\% to 35\%. However, a utilitarian planner would actually
prefer to raise UI relative to current US levels, even in the presence
of well-developed credit markets.