You are hired by the presidential administration to review the unemployment insurance program, which currently replaces 45% of a worker's wages for 26 weeks after she loses her job. The empirical evidence on unemployment spell durations suggests that workers who leave unemployment earlier (that is, find or take a job sooner) have no higher post-unemployment wages than workers who leave unemployment later. This result could be interpreted as evidence that the quality of the job match does not improve as the unemployment spell grows longer.

Q. An alternative explanation for this evidence is that workers with longer unemployment spells are less qualified than workers with shorter unemployment spells. How could you empirically distinguish between this explanation and the explanation put forth in (a)?

This is the answer I got for part (a) referring to the moral hazard costs of unemployment insurance.

This interpretation implies that the moral hazard cost of unemployment insurance increases as the unemployment insurance becomes more favorable.

Explanation:

The moral hazard associated with unemployment insurance that those who receive it might put in less effort to look for a new job and therefore are going to more heavily dependent on the unemployment insurance.

One of the motivations for unemployment insurance is to relax constraints faced by unemployed individuals. The insurance allows these individuals to find a job that better matches their interests and tastes. However we are given that the empirical evidence indicates there is no evidence of the unemployment insurance leading to better quality of job matches.

One reason could for this result could be that individuals are not utilizing the unemployment insurance to find better quality jobs. Rather the unemployment insurance might be making them put in less effort in looking for new jobs and this is the moral hazard cost associated with unemployment insurance.