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Business Cycle Dependent Unemployment Insurance

  • Torben M. Andersen


    (School of Economics and Management, Aarhus University, Denmark)

  • Michael Svarer


    (School of Economics and Management, Aarhus University, Denmark)

The consequences of business cycle contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between "good" and "bad" states of nature. We show that not only is there an insurance argument for such contingencies, but there may also be an incentive argument. Since benefits may be less distortionary in a recession than a boom, it follows that counter-cyclical benefits reduce average distortions compared to state independent benefits. We show that optimal (utilitarian) benefits are counter-cyclical and may reduce the structural (average) unemployment rate, although the variability of unemployment may increase.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2010-16.

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Length: 37
Date of creation: 15 Sep 2010
Date of revision:
Handle: RePEc:aah:aarhec:2010-16
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