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Optimal Unemployment Insurance Design: Time Limits, Monitoring, or Workfare?

  • Peter Fredriksson
  • Bertil Holmlund

This paper analyses crucial design features of unemployment insurance (UI) policies. We examine three different means of improving the efficiency of UI: the duration of benefit payments, monitoring in conjunction with sanctions, and workfare. To that end we develop a quantitative model of equilibrium unemployment. The model features worker heterogeneity, which takes the form of differences in preferences for leisure. All the instruments are ways of limiting the duration of UI benefit receipt and the model can be used to compare them in a coherent fashion. The analysis suggests that a system with monitoring and sanctions restores search incentives most effectively, since it brings additional incentives to search actively so as to avoid the sanction. Therefore, the UI provider can offer a more generous UI replacement rate in a system with monitoring and sanctions than in the other two systems. Workfare appears to be inferior to the other two systems.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1019.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1019
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  1. Boone, Jan & Fredriksson, Peter & Holmlund, Bertil & van Ours, Jan, 2002. "Optimal unemployment insurance with monitoring and sanctions," Working Paper Series 2002:21, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  2. Beaudry, Paul & Blackorby, Charles, 2004. "Taxes And Employment Subsidies In Optimal Redistribution Programs," The Warwick Economics Research Paper Series (TWERPS) 708, University of Warwick, Department of Economics.
  3. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
  4. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  5. 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.
  6. Lalive, R. & van Ours, J.C. & Zweimüller, J., 2002. "The Effect of Benefit Sanctions on the Duration of Unemployment," Discussion Paper 2002-19, Tilburg University, Center for Economic Research.
  7. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  8. Dale T. Mortensen, 1977. "Unemployment Insurance and Job Search Decisions," ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  9. Boone, Jan & van Ours, Jan C., 2000. "Modeling Financial Incentives to Get Unemployed Back to Work," IZA Discussion Papers 108, Institute for the Study of Labor (IZA).
  10. Peter Fredriksson & Bertil Holmlund, 2003. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," CESifo Working Paper Series 922, CESifo Group Munich.
  11. Gerard J. van den Berg & Bas van der Klaauw & Jan C. van Ours, 1998. "Punitive Sanctions and the Transition Rate from Welfare to Work," Tinbergen Institute Discussion Papers 98-076/3, Tinbergen Institute.
  12. Carl Davidson & Stephen A. Woodbury, 1995. "Optimal Unemployment Insurance," Upjohn Working Papers and Journal Articles 95-35, W.E. Upjohn Institute for Employment Research.
  13. Dan A. Black & Jeffrey A. Smith & Mark C. Berger & Brett J. Noel, 2003. "Is the Threat of Reemployment Services More Effective Than the Services Themselves? Evidence from Random Assignment in the UI System," American Economic Review, American Economic Association, vol. 93(4), pages 1313-1327, September.
  14. Jaap H. Abbring & Gerard J. Berg & Jan C. Ours, 2005. "The Effect of Unemployment Insurance Sanctions on the Transition Rate from Unemployment to Employment," Economic Journal, Royal Economic Society, vol. 115(505), pages 602-630, 07.
  15. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
  16. Besley, T. & Coate, S., 1991. "The Design Of Income Maintenance Programs," Papers 74, Princeton, Woodrow Wilson School - John M. Olin Program.
  17. John Hassler & José V. Rodriguez Mora, 2002. "Should UI Benefits Really Fall over Time?," CESifo Working Paper Series 804, CESifo Group Munich.
  18. Terry R. Johnson & Daniel H. Klepinger, 1994. "Experimental Evidence on Unemployment Insurance Work-Search Policies," Journal of Human Resources, University of Wisconsin Press, vol. 29(3), pages 665-717.
  19. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  20. Claus Thustrup Kreiner & Torben Tranas, 2005. "Optimal Workfare with Voluntary and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 459-474, 09.
  21. Dan A. Black & Jeffrey A. Smith & Mark C. Berger & Brett J. Noel, 1999. "Is the Threat of Training More Effective Than Training Itself? Experimental Evidence from the UI System," UWO Department of Economics Working Papers 9913, University of Western Ontario, Department of Economics.
  22. Gerard van den Berg & Bas van der Klaauw, 2000. "Counseling and Monitoring of Unemployed Workers: Theory and Evidence from a Social Experiment," Econometric Society World Congress 2000 Contributed Papers 0972, Econometric Society.
  23. 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.
  24. Claus T. Hansen & Torben Tranaes, 2000. "Optimal Workfare in a Society of Workers and Non-Workers," Econometric Society World Congress 2000 Contributed Papers 0758, Econometric Society.
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