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Should Unemployment Insurance Vary With the Unemployment Rate? Theory and Evidence

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  • Kory Kroft
  • Matthew J. Notowidigdo

Abstract

We study how the level of unemployment insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, we find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17173.

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Date of creation: Jun 2011
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Handle: RePEc:nbr:nberwo:17173

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Citations

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Cited by:
  1. Rothstein, Jesse & Valletta, Robert G., 2014. "Scraping by: Income and program participation after the loss of extended unemployment benefits," Working Paper Series 2014-6, Federal Reserve Bank of San Francisco.
  2. Tatsiramos, K. & Ours, J.C. van, 2012. "Labor Market Effects of Unemployment Insurance Design," Discussion Paper 2012-082, Tilburg University, Center for Economic Research.
  3. Lukas Inderbitzin & Stefan Staubli & Josef Zweimüller, 2013. "Extended Unemployment Benefits and Early Retirement: Program Complementarity and Program Substitution," Economics working papers 2013-06, Department of Economics, Johannes Kepler University Linz, Austria.
  4. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
  5. Røed, Knut, 2012. "Active Unemployment Insurance," IZA Policy Papers 41, Institute for the Study of Labor (IZA).
  6. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 143-213.
  7. Arash Nekoei & Andrea Weber, 2014. "Does Extending Unemployment Benefits Improve Job Quality?," NRN working papers 2014-04, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
  8. repec:wil:wileco:2012-10 is not listed on IDEAS
  9. Eugster, Beatrix, 2013. "Effects of a higher replacement rate on unemployment durations, employment, and earnings," Economics Working Paper Series 1320, University of St. Gallen, School of Economics and Political Science.
  10. Richard Fabling & David C. Maré, 2012. "Cyclical Labour Market Adjustment in New Zealand: The Response of Firms to the Global Financial Crisis and its Implications for Workers," Working Papers 12_04, Motu Economic and Public Policy Research.
  11. Farber, Henry & Valletta, Robert G., 2013. "Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market," IZA Discussion Papers 7347, Institute for the Study of Labor (IZA).
  12. Henry S. Farber & Robert G. Valletta, 2013. "Do extended unemployment benefits lengthen unemployment spells? evidence from recent cycles in the U.S. labor market," Working Paper Series 2013-09, Federal Reserve Bank of San Francisco.

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