Unemployment Risk Estimation and Adverse-selection in Coverage of Unemployment Insurance in Iran

Abstract

Unemployment insurance is the most basic social security plan in the world. However, the problems of moral hazard and adverse selection have confined unemployment insurance to low-risk occupational groups. The coverage of unemployment insurance in Iran seems to be even less extensive. In 2017, According to the Statistics Center of Iran, only 2/5 % of the unemployed were covered by unemployment insurance. However, even with this limited coverage, unemployment insurance funds are exposed to financial difficulties. The presence of moral hazard among the Iranian unemployed, insured for unemployment, is well confirmed in the literature. They provide a negative association between unemployment benefits and unemployed incentives to return to the labor market. They also found that unemployed workers with more statutory duration of unemployment benefits have less motivation to find new jobs. This study addresses the problem of adverse selection in the unemployment insurance plan neglected in the literature. So, we first estimate the unemployment risk in terms of incidence and duration of unemployment. Then, considering the relation between workers' risk of unemployment and their insurance coverage, we investigate adverse selection in the labor market. The results confirm adverse selection in the Iranian insurance plan that forces insurance funds to exclude a broad group of employees, e.g., self-employed workers and labor forces who lack the skills necessary to get hired.

Keywords

• unemployment insurance
• adverse selection
• unemployment risk
• unemployment duration
• insurance coverage