IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Optimal Unemployment Insurance Over the Business Cycle

Author Info

Listed author(s):
  • Camille Landais
  • Pascal Michaillat
  • Emmanuel Saez

Abstract

This paper characterizes optimal unemployment insurance (UI) over the business cycle using a model of equilibrium unemployment in which jobs are rationed in recession. It offers a simple optimal UI formula that can be applied to a broad class of equilibrium unemployment models. In addition to the usual statistics (risk aversion and micro-elasticity of unemployment with respect to UI), a macro-elasticity appears in the formula to capture the macroeconomic impact of UI on unemployment. In a model with job rationing, the formula implies that optimal UI is countercyclical. This result arises because in recession, jobs are lacking irrespective of job search. Therefore (1) a higher aggregate search effort cannot reduce aggregate unemployment much; and (2) individual search effort creates a negative externality by reducing other jobseekers' probability of finding a job as in a rat race. Hence the social benefits of job search are low. In a calibrated model, optimal UI increases significantly in recession. This quantitative result holds whether the government adjusts the level or duration of benefits; whether it balances its budget each period or uses deficit spending.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://cep.lse.ac.uk/pubs/download/dp1078.pdf
Download Restriction: no

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1078.

as
in new window

Length:
Date of creation: Sep 2011
Handle: RePEc:cep:cepdps:dp1078
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Keywords: Unemployment insurance; business cycle; job rationing; matching frictions;

Other versions of this item:

Find related papers by 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
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
  • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  2. Bruno Crépon & Esther Duflo & Marc Gurgand & Roland Rathelot & Philippe Zamora, 2013. "Do Labor Market Policies have Displacement Effects? Evidence from a Clustered Randomized Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 531-580.
  3. Raj Chetty, 2004. "Optimal Unemployment Insurance When Income Effects are Large," NBER Working Papers 10500, National Bureau of Economic Research, Inc.
  4. Haefke, Christian & Sonntag, Marcus & van Rens, Thijs, 2013. "Wage rigidity and job creation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 887-899.
  5. Lalive, Rafael, 2008. "How do extended benefits affect unemployment duration A regression discontinuity approach," Journal of Econometrics, Elsevier, vol. 142(2), pages 785-806, February.
  6. Fredriksson, Peter & Holmlund, Bertil, 2001. "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 370-399, April.
  7. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
  8. 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, Research Centre.
  9. Melvyn Coles & Adrian Masters, 2006. "Optimal Unemployment Insurance in a Matching Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 109-138, January.
  10. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 130(2), pages 507-569.
  11. Pascal Michaillat & Emmanuel Saez, 2013. "A model of aggregate demand and unemployment," LSE Research Online Documents on Economics 51579, London School of Economics and Political Science, LSE Library.
  12. Rasmus Lentz, 2009. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 37-57, January.
  13. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1511-1560.
  14. Marc FERRACCI & Grégory JOLIVET & Gerard J van den Berg, 2009. "“Treatment Evaluation in the Case of Interaction Within Markets”," Working Papers 2009-22, Centre de Recherche en Economie et Statistique.
  15. Kiley Michael T., 2003. "How Should Unemployment Benefits Respond to the Business Cycle?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-22, July.
  16. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  17. Richard Blundell & Monica Costa Dias & Costas Meghir & John Van Reenen, 2004. "Evaluating the Employment Impact of a Mandatory Job Search Program," Journal of the European Economic Association, MIT Press, vol. 2(4), pages 569-606, 06.
  18. Phillip B. Levine, 1993. "Spillover Effects between the Insured and Uninsured Unemployed," ILR Review, Cornell University, ILR School, vol. 47(1), pages 73-86, October.
  19. Bemjamin Villena-Roldan, 2009. "Aggregate Implications of Employer Search and Recruiting Selection," 2009 Meeting Papers 97, Society for Economic Dynamics.
  20. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  21. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
  22. Johannes F. Schmieder† & Till von Wachter & Stefan Bender, 2011. "The Effects Of Extended Unemployment Insurance Over The Business Cycle: Evidence From Regression Discontinuity Estimates Over Twenty Years," Boston University - Department of Economics - Working Papers Series WP2011-063, Boston University - Department of Economics.
  23. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  24. Pascal Michaillat, 2012. "Do Matching Frictions Explain Unemployment? Not in Bad Times," American Economic Review, American Economic Association, vol. 102(4), pages 1721-1750, June.
  25. Johannes F. Schmieder & Till M. von Wachter & Stefan Bender, 2012. "The Long-Term Effects of Unemployment Insurance Extensions on Employment," NBER Working Papers 17814, National Bureau of Economic Research, Inc.
  26. Barron, John M & Berger, Mark C & Black, Dan A, 1997. "Employer Search, Training, and Vacancy Duration," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 167-192, January.
  27. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  28. Sánchez, Juan M., 2008. "Optimal state-contingent unemployment insurance," Economics Letters, Elsevier, vol. 98(3), pages 348-357, March.
  29. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, vol. 5(05), pages 742-747, November.
  30. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
  31. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
  32. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
  33. Lars A. Stole & Jeffrey Zwiebel, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 375-410.
  34. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  35. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  36. Simon Burgess & Stefan Profit, 2001. "Externalities in the matching of workers and firms in Britain," LSE Research Online Documents on Economics 20130, London School of Economics and Political Science, LSE Library.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as
in new window


Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp1078. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.