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Optimal unemployment insurance in an equilibrium business-cycle model

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  • Mitman, Kurt
  • Rabinovich, Stanislav

Abstract

The optimal cyclical behavior of unemployment insurance is characterized in an equilibrium search model with risk-averse workers. Contrary to the current US policy, the path of optimal unemployment benefits is pro-cyclical – positively correlated with productivity and employment. Furthermore, optimal unemployment benefits react non-monotonically to a productivity shock: in response to a fall in productivity, they rise on impact but then fall significantly below their pre-recession level during the recovery. As compared to the current US unemployment insurance policy, the optimal state-contingent unemployment benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains.

Suggested Citation

  • Mitman, Kurt & Rabinovich, Stanislav, 2015. "Optimal unemployment insurance in an equilibrium business-cycle model," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 99-118.
  • Handle: RePEc:eee:moneco:v:71:y:2015:i:c:p:99-118
    DOI: 10.1016/j.jmoneco.2014.11.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jochen Mankart & Rigas Oikonomou, 2017. "Household Search and the Aggregate Labour Market," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1735-1788.
    2. Boeri, Tito & Jimeno, Juan Francisco, 2015. "The unbearable divergence of unemployment in Europe," LSE Research Online Documents on Economics 65001, London School of Economics and Political Science, LSE Library.
    3. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, Elsevier.
    4. David Wiczer, 2013. "Long-term Unemployment: Attached and Mismatched?," 2013 Meeting Papers 1101, Society for Economic Dynamics.
    5. Merkl, Christian & van Rens, Thijs, 2019. "Selective hiring and welfare analysis in labor market models," Labour Economics, Elsevier, vol. 57(C), pages 117-130.
    6. Serdar Birinci & Kurt Gerrard See, 2018. "How Should Unemployment Insurance vary over the Business Cycle?," 2018 Meeting Papers 69, Society for Economic Dynamics.
    7. Krebs, Tom & Scheffel, Martin, 2016. "Labor Market Institutions and the Cost of Recessions," IZA Discussion Papers 10442, Institute of Labor Economics (IZA).
    8. Marius Clemens & Guillaume Claveres, 2017. "Unemployment Insurance Union," 2017 Meeting Papers 1340, Society for Economic Dynamics.
    9. Rujiwattanapong, W. Similan, 2018. "Unemployment insurance and labour productivity over the business cycle," LSE Research Online Documents on Economics 90872, London School of Economics and Political Science, LSE Library.
    10. Acedański, Jan, 2016. "Youth unemployment and welfare gains from eliminating business cycles — The case of Poland," Economic Modelling, Elsevier, vol. 57(C), pages 248-262.
    11. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market reforms in the time of imbalance," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 69-93.
    12. Pei, Yun & Xie, Zoe, 2016. "A Quantitative Theory of Time-Consistent Unemployment Insurance," FRB Atlanta Working Paper 2016-11, Federal Reserve Bank of Atlanta, revised 01 Dec 2017.
    13. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2018. "A Macroeconomic Approach to Optimal Unemployment Insurance: Applications," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 182-216, May.
    14. Boeri, Tito & Jimeno, Juan F., 2016. "Learning from the Great Divergence in unemployment in Europe during the crisis," Labour Economics, Elsevier, vol. 41(C), pages 32-46.
    15. repec:eee:labeco:v:52:y:2018:i:c:p:27-39 is not listed on IDEAS
    16. Stähler, Nikolai & Moyen, Stephane & Winkler, Fabian, 2016. "Optimal Unemployment Insurance and International Risk Sharing," Annual Conference 2016 (Augsburg): Demographic Change 145612, Verein für Socialpolitik / German Economic Association.
    17. Alan Finkelstein Shapiro & Maria Olivero, 2018. "Lending Relationships and Labor Market Dynamics," 2018 Meeting Papers 1113, Society for Economic Dynamics.
    18. Parkhomenko, Andrii, 2016. "Opportunity to Move: Macroeconomic Effects of Relocation Subsidies," MPRA Paper 75256, University Library of Munich, Germany.
    19. Xie, Zoe, 2015. "Delayed Collection of Unemployment Insurance during Recessions," MPRA Paper 76564, University Library of Munich, Germany.
    20. Andersen, Torben M. & Kristoffersen, Mark Strøm & Svarer, Michael, 2018. "Benefit reentitlement conditions in unemployment insurance schemes," Labour Economics, Elsevier, vol. 52(C), pages 27-39.
    21. Nils Mattis Gornemann, 2018. "HANK meets Ramsey: Optimal Coordination of Monetary and Labor Market Policies," 2018 Meeting Papers 1252, Society for Economic Dynamics.
    22. Pei, Yun & Xie, Zoe, 2016. "Government Commitment and Unemployment Insurance Over the Business Cycle," MPRA Paper 76563, University Library of Munich, Germany.

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