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Optimal Unemployment Insurance in Search Equilibrium

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  • Fredriksson, Peter

    ()
    (Department of Economics)

  • Holmlund, Bertil

    ()
    (Department of Economics)

Abstract

Should unemployment compensation be paid indefinitely at a fixed rate or should it decline (or increase) over a worker’s unemployment spell? We examine these issues using an equilibrium model of search unemployment. The model features worker-firm bargaining over wages, free entry of new jobs, and endogenous search effort among the unemployed. The main result is that an optimal insurance program implies a declining sequence of unemployment compensation over the spell of unemployment. Numerical calibrations of the model suggest that there are non-trivial welfare gains associated with switching from an optimal uniform benefit structure to an optimally differentiated system.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 1998:2.

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Length: 33 pages
Date of creation: 19 Jan 1998
Date of revision:
Publication status: Published in Journal of Labor Economics, 2001, pages 370-399.
Handle: RePEc:hhs:uunewp:1998_002

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Job search; Unemployment; Unemployment insurance;

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