Unemployment benefits can address the failures of credit markets by enabling unemployed people to spend more time searching for a new job – even in countries like Norway, which have an equitable wealth distribution and a generous welfare state. That is the central conclusion of research by Christoph Basten, Andreas Fagereng and Kjetil Telle, published in the May 2014 issue of the Economic Journal.

Their study finds that less well-off people in Norway who lost their job but were entitled to one-off severance payments were able to spend more time in unemployment looking for the most suitable job. Such longer search duration has the social value of enabling the unemployed to find a job that better matches their skills, hence allowing them to earn a higher salary and pay higher taxes. The authors comment:

‘Our findings show that unemployment benefits can be useful not only on the grounds of equity concerns, but also with a view to economic efficiency.

‘Even more efficient may be the granting of well-designed loans to the unemployed, as these could relieve liquidity concerns without causing any moral hazard.’