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How Should Unemployment Benefits Respond to the Business Cycle?

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  • Kiley Michael T.

    () (Federal Reserve Board)

Abstract

Unemployment insurance programs balance the benefits of consumption smoothing against the disincentive effects of unemployment benefits. This balance is likely sensitive to the cyclical state of the economy, and hence the generosity of benefits should also respond to the business cycle. The nature of such responses in an optimal unemployment insurance (UI) program is analyzed in a simple model. The results suggest that an optimal UI program would increase the initial level of benefits and probably extend higher benefits over time in response to a recessionary shock. In the simple model, an extension of benefits, such as exists automatically in the system in the United States, provides poorer insurance and poorer incentives than the optimal program, and does so at a higher cost. Moreover, the UI system in the U.S. provides a substantially higher level of welfare to workers who lose jobs during tight labor markets.

Suggested Citation

  • 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.
  • Handle: RePEc:bpj:bejeap:v:topics.3:y:2003:i:1:n:9
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    Citations

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    Cited by:

    1. Andersen, Torben M & Svarer, Michael, 2009. "Business Cycle Dependent Unemployment Insurance," CEPR Discussion Papers 7334, C.E.P.R. Discussion Papers.
    2. Landais, Camille & Michaillat, Pascal & Saez, Emmanuel, 2010. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics 35596, London School of Economics and Political Science, LSE Library.
    3. Kurt Mitman & Stanislav Rabinovich, 2011. "Pro-Cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model," PIER Working Paper Archive 11-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    4. Trine Filges & John Kennes & Torban Tranaes, 2006. "Social Preferences and Labor Market Policy," 2006 Meeting Papers 562, Society for Economic Dynamics.
    5. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
    6. Ek, Susanne, 2012. "Unemployment benefits or taxes: How should policy makers redistribute income over the business cycle?," Working Paper Series, Center for Labor Studies 2012:4, Uppsala University, Department of Economics.
    7. Pollak, Andreas, 2013. "Employment Insurance and the Business Cycle," MPRA Paper 49358, University Library of Munich, Germany.
    8. Jeremy Schwartz, 2012. "Unemployment Insurance and the Business Cycle: What Adjustments are Needed?," EcoMod2012 3674, EcoMod.
    9. Konstantinos Tatsiramos & Jan C. Ours, 2014. "Labor Market Effects Of Unemployment Insurance Design," Journal of Economic Surveys, Wiley Blackwell, vol. 28(2), pages 284-311, April.
    10. Moyen, Stéphane & Stähler, Nikolai & Winkler, Fabian, 2016. "Optimal unemployment insurance and international risk sharing," Discussion Papers 33/2016, Deutsche Bundesbank.
    11. Moyen, Stéphane & Stähler, Nikolai, 2014. "Unemployment Insurance And The Business Cycle: Should Benefit Entitlement Duration React To The Cycle?," Macroeconomic Dynamics, Cambridge University Press, vol. 18(03), pages 497-525, April.
    12. Kory Kroft & Matthew J. Notowidigdo, 2016. "Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 1092-1124.
    13. 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.
    14. Jeremy Schwartz, 2014. "The Job Search Intensity Supply Curve: How Labor Market Conditions Affect Job Search Effort," Upjohn Working Papers and Journal Articles 14-215, W.E. Upjohn Institute for Employment Research.
    15. Johannes F. Schmieder† & Till von Wachter & Stefan Bender, 2011. "The Effects Of Extended Unemployment Insurance Over The Business Cycle: Evidence From Regression Discontinuity Estimates Over Twenty Years," Boston University - Department of Economics - Working Papers Series WP2011-063, Boston University - Department of Economics.
    16. Sánchez, Juan M., 2008. "Optimal state-contingent unemployment insurance," Economics Letters, Elsevier, vol. 98(3), pages 348-357, March.
    17. Mark Strøm Kristoffersen, 2012. "Business Cycle Dependent Unemployment Benefits with Wealth Heterogeneity and Precautionary Savings," Economics Working Papers 2012-19, Department of Economics and Business Economics, Aarhus University.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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