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Business Cycle Dependent Unemployment Insurance

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  • Torben M. Andersen

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

  • Michael Svarer

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

Abstract

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.

Suggested Citation

  • Torben M. Andersen & Michael Svarer, 2010. "Business Cycle Dependent Unemployment Insurance," Economics Working Papers 2010-16, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2010-16
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. Torben M. Andersen, 2014. "Tuning unemployment insurance to the business cycle," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-54, May.
    4. 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.
    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. 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.
    7. Pollak, Andreas, 2013. "Employment Insurance and the Business Cycle," MPRA Paper 49358, University Library of Munich, Germany.
    8. 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.
    9. Torben Andersen, 2010. "Unemployment Persistence," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(1), pages 23-28, April.

    More about this item

    Keywords

    Unemployment benefits; business cycle; insurance; incentives;

    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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