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The Macroeconomic Role of Unemployment Compensation

Author

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  • Tomer Blumkin
  • Yossi Hadar
  • Eran Yashiv

Abstract

The standard motivation for unemployment compensation is consumption smoothing and most papers in the literature have analyzed trade-offs involving consumption smoothing and moral hazard. This paper shows how such policy can increase output by enhancing the assignment of workers to jobs in the face of firm productivity heterogeneity and skill-biased technological change. It shows that in order to do so policy needs to be a function of the properties of the firm's productivity distribution. The paper undertakes an empiricallygrounded, normative analysis of this issue. The analysis also bears upon the wage distribution, showing how optimal unemployment compensation policy is affected by wages and affects them in turn. A key insight emerging from the analysis is that the degree of firm productivity heterogeneity, in terms of skewness and variance, matters for the design of the time path of unemployment compensation.

Suggested Citation

  • Tomer Blumkin & Yossi Hadar & Eran Yashiv, 2009. "The Macroeconomic Role of Unemployment Compensation," CEP Discussion Papers dp0909, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0909
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    References listed on IDEAS

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    More about this item

    Keywords

    Productivity; heterogeneity; unemployment compensation policy; technological change; assortative matching;

    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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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