How Should Unemployment Benefits Respond to the Business Cycle?
AbstractUnemployment insurance programs balance the benefits of consumption smoothing against the disincentive effects of unemployment benefits. This balance is likely sensitive to the cyclical state of the economy, and hence the generosity of benefits should also respond to the business cycle. The nature of such responses in an optimal unemployment insurance (UI) program is analyzed in a simple model. The results suggest that an optimal UI program would increase the initial level of benefits and probably extend higher benefits over time in response to a recessionary shock. In the simple model, an extension of benefits, such as exists automatically in the system in the United States, provides poorer insurance and poorer incentives than the optimal program, and does so at a higher cost. Moreover, the UI system in the U.S. provides a substantially higher level of welfare to workers who lose jobs during tight labor markets.
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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.
Volume (Year): 3 (2003)
Issue (Month): 1 (July)
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Web page: http://www.degruyter.com
Other versions of this item:
- Michael T. Kiley, 2003. "How should unemployment benefits respond to the business cycle?," Finance and Economics Discussion Series 2003-01, Board of Governors of the Federal Reserve System (U.S.).
- Michael Kiley, 2002. "How Should Unemployment Benefits Respond to the Business Cycle?," Computing in Economics and Finance 2002 167, Society for Computational Economics.
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
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