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Optimal Unemployment Insurance, With Human Capital Depreciation, And Duration Dependence

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  • Nicola Pavoni

Abstract

This article introduces the possibility of a deterioration in job opportunities during unemployment into the standard optimal unemployment insurance (UI) design framework and characterizes the efficient UI scheme. The optimal program may display two novel features, which cannot be present in stationary models. First, UI transfers are bounded below by a minimal "assistance" level that arises endogenously in the efficient contract. Second, the optimal scheme implies a "wage subsidy" for long-term unemployed workers. Numerical simulations based on the Spanish and U.S. economies suggest that both assistance transfers and wage subsidies should be part of the UI scheme in these countries. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • Nicola Pavoni, 2009. "Optimal Unemployment Insurance, With Human Capital Depreciation, And Duration Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 323-362, May.
  • Handle: RePEc:ier:iecrev:v:50:y:2009:i:2:p:323-362
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