Optimal unemployment accounts based on observable parameters

Baily (1978)’s model provides an observable condition of optimality for unemployment benefits (“b”). We add unemployment accounts (UAs) into the model, where employed individuals deposit a “s” saving rate and UAs finance unemployment benefits until their funds are exhausted and tax-financed benefits begin. The idea is that UAs reduce the distortion caused by pooling financed benefits, but in doing so they lower consumption smoothing across states of nature. We found that Baily (1978)’s rule for optimal benefits remains unchanged if UAs are added into his model, and we found a simple and easily observable rule for the optimal saving rate into UAs: the proportion of unemployment to be self-financed should equal the ratio of unemployment duration elasticity with respect to s and b.