Unemployment Insurance, Productivity, and Wage Dispersion Alok Kumar ∗

The effects of unemployment insurance on productivity, output, and within-skill wage dispersion are studied in a search environment in which firms enjoy monopsony power in the labor market. The model features wage posting by the firms and on-the-job search by the workers. The unemployed workers receive unemployment benefits financed by a proportional pay-roll tax. In equilibrium, unemployment insurance increases welfare not only by providing consumption-smoothing benefits but also by increasing output. Additionally, higher unemployment benefits lead to less within-skill wage dispersion, compression of the lower half of the wage earnings distribution, and a smaller incidence of low wages