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The Macroeconomic Role of Unemployment Compensation

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Author Info
Tomer Blumkin
Yossi Hadar
Eran Yashiv
Abstract

The standard motivation for unemployment compensation is consumption smoothing andmost papers in the literature have analyzed trade-offs involving consumption smoothing andmoral hazard. This paper shows how such policy can increase output by enhancing theassignment of workers to jobs in the face of firm productivity heterogeneity and skill-biasedtechnological change. It shows that in order to do so policy needs to be a function of theproperties of the firm's productivity distribution. The paper undertakes an empiricallygrounded,normative analysis of this issue. The analysis also bears upon the wagedistribution, showing how optimal unemployment compensation policy is affected by wagesand affects them in turn. A key insight emerging from the analysis is that the degree of firmproductivity heterogeneity, in terms of skewness and variance, matters for the design of thetime path of unemployment compensation.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0909.

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Date of creation: Feb 2009
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Handle: RePEc:cep:cepdps:dp0909

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Related research
Keywords: Productivity; heterogeneity; unemployment compensation policy; technologicalchange; assortative matching;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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    Other versions:
  6. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January. [Downloadable!] (restricted)
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  7. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December. [Downloadable!] (restricted)
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  11. James Albrecht & Susan Vroman, 2005. "Equilibrium Search With Time-Varying Unemployment Benefits," Economic Journal, Royal Economic Society, vol. 115(505), pages 631-648, 07. [Downloadable!] (restricted)
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  19. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
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  21. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2005-2), pages 67-150. [Downloadable!]
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