Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Unemployment Insurance over the Business Cycle

Contents:

Author Info

  • Camille Landais

    ()
    (London School of Economics (LSE), Economics Department)

  • Pascal Michaillat

    ()
    (London School of Economics (LSE), Economics Department
    Centre for Macroeconomics (CFM))

  • Emmanuel Saez

    ()
    (University of California-Berkeley, Department of Economics)

Abstract

This paper analyzes optimal unemployment insurance (UI) over the business cycle. We consider a general matching model of the labor market. For a given UI, the economy is efficient if tightness satisfies a generalized Hosios condition, slack if tightness is too low, and tight if tightness is too high. The optimal UI formula is the sum of the standard Baily-Chetty term, which trades off search incentives and insurance, and an externality-correction term, which is positive if UI brings the economy closer to efficiency and negative otherwise. Our formula therefore deviates from the Baily-Chetty formula when the economy is inefficient and UI affects labor market tightness. In a model with rigid wages and concave production function, UI increases tightness; hence, UI should be more generous than in the Baily-Chetty formula when the economy is slack, and less generous otherwise. In contrast, in a model with linear production function and Nash bargaining, UI increases wages and reduces tightness; hence, UI should be less generous than in the Baily-Chetty formula when the economy is slack, and more generous otherwise. Deviations from the Baily-Chetty formula can be quantitatively large using realistic empirical parameters.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.centreformacroeconomics.ac.uk/pdf/CFMDP2013-03-Paper.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1303.

as in new window
Length: 43 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:cfm:wpaper:1303

Contact details of provider:
Web page: http://www.centreformacroeconomics.ac.uk/
More information through EDIRC

Related research

Keywords: business cycle; unemployment insurance;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
  2. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-On-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1511-1560, November.
  3. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  4. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
  5. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
  6. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  7. Moyen, Stéphane & Stähler, Nikolai, 2009. "Unemployment insurance and the business cycle: prolong benefit entitlements in bad times?," Discussion Paper Series 1: Economic Studies 2009,30, Deutsche Bundesbank, Research Centre.
  8. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  9. Marc FERRACCI & Grégory JOLIVET & Gerard J van den Berg, 2009. "“Treatment Evaluation in the Case of Interaction Within Markets”," Working Papers 2009-22, Centre de Recherche en Economie et Statistique.
  10. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  11. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2006. "Wage Rigidity and Job Creation," 2006 Meeting Papers 773, Society for Economic Dynamics.
  12. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
  13. Kiley Michael T., 2003. "How Should Unemployment Benefits Respond to the Business Cycle?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-22, July.
  14. Barron, John M & Berger, Mark C & Black, Dan A, 1997. "Employer Search, Training, and Vacancy Duration," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 167-92, January.
  15. Arulampalam, Wiji & Stewart, Mark B, 1995. "The Determinants of Individual Unemployment Durations in an Era of High Unemployment," Economic Journal, Royal Economic Society, vol. 105(429), pages 321-32, March.
  16. Andersen, Torben M & Svarer, Michael, 2009. "Business Cycle Dependent Unemployment Insurance," CEPR Discussion Papers 7334, C.E.P.R. Discussion Papers.
  17. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  18. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  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.
  20. Johannes F. Schmieder & Till M. von Wachter & Stefan Bender, 2012. "The Effects of Extended Unemployment Insurance over the Business Cycle: Evidence from Regression Discontinuity Estimates Over Twenty Years," NBER Working Papers 17813, National Bureau of Economic Research, Inc.
  21. Phillip B. Levine, 1993. "Spillover effects between the insured and uninsured unemployed," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(1), pages 73-86, October.
  22. Rasmus Lentz, 2003. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," CAM Working Papers 2004-10, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  23. Sánchez, Juan M., 2008. "Optimal state-contingent unemployment insurance," Economics Letters, Elsevier, vol. 98(3), pages 348-357, March.
  24. Pascal Michaillat, 2010. "Do Matching Frictions Explain Unemployment? Not in Bad Times," CEP Discussion Papers dp1024, Centre for Economic Performance, LSE.
  25. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  26. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
  27. Cahuc, Pierre & Lehmann, Etienne, 1999. "Should unemployment benefits decrease with unemployment spell ?," CEPREMAP Working Papers (Couverture Orange) 9916, CEPREMAP.
  28. Bruno Crépon & Esther Duflo & Marc Gurgand & Roland Rathelot & Philippe Zamora, 2012. "Do Labor Market Policies have Displacement Effects? Evidence from a Clustered Randomized Experiment," Working Papers 2012-28, Centre de Recherche en Economie et Statistique.
  29. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  30. Pascal Michaillat & Emmanuel Saez, 2013. "A model of aggregate demand and unemployment," LSE Research Online Documents on Economics 51579, London School of Economics and Political Science, LSE Library.
  31. Blundell, Richard William & Costa Dias, Monica & Meghir, Costas & Van Reenen, John, 2003. "Evaluating the Employment Impact of a Mandatory Job Search Programme," CEPR Discussion Papers 3786, C.E.P.R. Discussion Papers.
  32. Pascal Michaillat & Emmanuel Saez, 2014. "Aggregate Demand, Idle Time, and Unemployment," Upjohn Working Papers and Journal Articles 14-214, W.E. Upjohn Institute for Employment Research.
  33. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  34. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
  35. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
  36. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  37. Bemjamin Villena-Roldan, 2009. "Aggregate Implications of Employer Search and Recruiting Selection," 2009 Meeting Papers 97, Society for Economic Dynamics.
  38. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, vol. 5(05), pages 742-747, November.
  39. Simon Burgess & Stefan Profit, 2001. "Externalities in the matching of workers and firms in Britain," LSE Research Online Documents on Economics 20130, London School of Economics and Political Science, LSE Library.
  40. Melvyn Coles & Adrian Masters, 2006. "Optimal Unemployment Insurance in a Matching Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 109-138, January.
  41. Stepan Jurajda & Frederick J. Tannery, 2003. "Unemployment durations and extended unemployment benefits in local labor markets," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(2), pages 324-348, January.
  42. Raj Chetty, 2004. "Optimal Unemployment Insurance When Income Effects are Large," NBER Working Papers 10500, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Optimal Unemployment Insurance over the Business Cycle
    by Christian Zimmermann in NEP-DGE blog on 2010-12-17 11:01:01
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cfm:wpaper:1303. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martin Hannon).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.