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Business Cycle Dependent Unemployment Insurance

  • Andersen, Torben M
  • Svarer, Michael

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 also an incentive argument. If benefits are less distortionary in a recession than a boom, it follows that countercyclical benefits reduce average distortions compared to state independent benefits. We show that optimal benefits are state contingent and tend to reduce the structural (average) unemployment rate, although the variability of unemployment may increase.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7334.

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Date of creation: Jun 2009
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Handle: RePEc:cpr:ceprdp:7334
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