The debate between “structural” and “reduced-form” approaches has generated substantial controversy in applied economics. This article reviews a recent literature in public economics that combines the advantages of reduced-form strategies –transparent and credible identification – with an important advantage of structural models – the ability to make predictions about counterfactual outcomes and welfare. This literature has developed formulas for the welfare consequences of various policies that are functions of reduced-form elasticities rather than structural primitives. I present a general framework that shows how many policy questions can be answered by estimating a small set of sufficient statistics using program evaluation methods. I use this framework to synthesize the modern literature on taxation, social insurance, and behavioral welfare economics. Finally, I discuss problems in macroeconomics, labor, development, and industrial organization that could be tackled using the sufficient statistic approach.

Recent research seeking to explain the strong cyclicality of US unemployment emphasizes the role of wage rigidity. This paper proposes a micro-founded model of wage rigidity – an equilibrium business cycle model of job search, where risk neutral firms post optimal long-term contracts to attract risk averse workers. Equilibrium contracts feature wage smoothing, limited by the inability of parties to commit to contracts. The model is consistent with aggregate wage data if neither worker nor firm can commit, producing too rigid wages otherwise. Wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment.

This paper analyzes how job seekers’biased perceptions about their employment prospects affect the optimal design of unemployment insurance. Biased perceptions change the perceived value of insurance and the perceived return to search efforts. Policies implementing standard “suffi cient-statistics”formula become sub-optimal and a wedge arises between social and private insurance. A paternalistic social planner corrects for the implied search distortions, while private insurers respond to the misperceived value of insurance. Empirically, I find that unemployed job seekers greatly overestimate how quickly they will find work. As a consequence, privatizing unemployment insurance results in too low or rapidly decreasing unemployment benefits.

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We model the labor market impact of the three key provisions of the recent Massachusetts and national “mandate-based ” health reforms: individual and employer mandates and expansions in publicly-subsidized coverage. Using our model, we characterize the compensating differential for employer-sponsored health insurance (ESHI) — the causal change in wages associated with gaining ESHI. We also characterize the welfare impact of the labor market distortion induced by health reform. We show that the welfare impact depends on a small number of “sufficient statistics ” that can be recovered from labor market outcomes. Relying on the reform implemented in Massachusetts in 2006, we estimate the empirical analog of our model. We find that jobs with ESHI pay wages that are lower by an average of $6,058 annually, indicating that the compensating differential for ESHI is only slightly smaller in magnitude than the average cost of ESHI to employers. Because the newly-insured in Massachusetts valued ESHI, they were willing to accept lower wages, and the deadweight loss of mandate-based health reform was less than 5 % of what it would have been if the government had instead provided health insurance

This paper measures the effect of the ongoing extensions of unemployment insurance (UI) benefits on the unemployment rate using a calibrated structural model that features job search and consumption-saving decisions, skill depreciation, UI eligibility, and UI benefit extensions that capture what has happened in response to the recent downturn. I find that the extensions of UI benefits contributed to an increase in the unemployment rate by 1.4 percentage points, which is about 30 percent of an observed increase between the periods 2005-2007 and 2009-2011 (4.8 percent). Among the remaining 3.4 percentage points, 2.5 percentage points are due to the large increase in the separation rate, while the reduced job-finding rate due to lower productivity contributes 0.9 percentage point. Moreover, the contribution of the UI benefit extensions to the elevated unemployment rate increased from 2009 to 2011; while the number of vacancies has been recovering, the unemployment rate has remained elevated because of the successive extensions. The last extension in December 2010 has moderately slowed down the recovery of the unemployment rate. Specifically, the model indicates that the last extension keeps the unemployment rate higher by 0.6 percentage point during 2011.

Economists face difficulties explaining the strong cyclicality of US unemployment. This paper contributes both by developing modeling tools and evaluating a potentially important explanation. The paper develops a parsimonious equilibrium model of job search with aggregate productivity shocks, where i) workers face incomplete markets, and ii) wages are determined via optimal long-term contracts. Despite the large state space associated with long-term contracting, the equilibrium has a simple representation as a small system of differential equations. Incomplete markets amplify fluctuations in unemployment, and the results suggest an upper bound on how far they can go in explaining unemployment cyclicality.

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This paper examines the impact of corporate distress on firms ’ ability to attract job applicants. Using novel data from a leading online job search platform, we find that firms ’ financial health affects job seekers ’ perceptions and behavior. First, using survey responses, we find that job seekers accurately perceive firms’ financial health, as measured by the companies ’ credit default swap prices and other proxies. Second, analyzing responses to job postings by major financial firms during the recent financial crisis, we find that these perceptions affect job seekers ’ application decisions. An increase in an employer’s distress results in fewer and lower quality applicants for job openings at the firm. We find a decline in applications even when comparing applications to the exact same positions before and after entering distress. These effects are particularly evident in locations where the social safety net provides workers with weaker protections against unemployment and for positions requiring advanced training.