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Unemployment Insurance with Limited Duration and Variable Replacement Ratio - Effects on Optimal Search

  • Pekka Sinko
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    This paper analyses the effects of an unemployment insurance with limited potential duration in a job search model with endogenous effort. Both constant and declining time sequence of benefits are considered. The model extends the framework of Pissarides (2000) in assuming that workers maximise the joint value of unemployment search and the remaining unemployment benefits. Wage formation and aggregate labour market tightness are exogenously determined. We simulate the model numerically with parameters chosen to fit to the stylised facts of the Finnish labour market. We find that introduction of a benefit system reduces the effort of those who have been unemployed for a relatively short period, but increases the effort of those who have been unemployed for longer period. Concerning the declining time sequence of benefits, we find that if a faster depreciation of the replacement ratio is accompanied by a simultaneous increase in the initial benefit level so as to keep the present value of the insurance program intact, the search effort is either increased or remains unchanged irrespective of the unemployment duration. Such a reform is appealing for at least two reasons: it leaves the expected government spending intact and is likely to be neutral in terms of the wage pressure.

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    Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 253.

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    Date of creation: 30 Apr 2001
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    Handle: RePEc:fer:dpaper:253
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    1. 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.
    2. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," Papers 1997-25, Uppsala - Working Paper Series.
    3. Carl Davidson & Stephen A. Woodbury, 1995. "Optimal Unemployment Insurance," Upjohn Working Papers and Journal Articles 95-35, W.E. Upjohn Institute for Employment Research.
    4. Marimon, Ramon & Zilibotti, Fabrizio, 1999. "Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits," Economic Journal, Royal Economic Society, vol. 109(455), pages 266-91, April.
    5. Kettunen, Juha, 1991. "A Search Theoretical Analysis of the Finnish Unemployment Insurance System," Discussion Papers 374, The Research Institute of the Finnish Economy.
    6. Fredriksson, Peter & Holmlund, Bertil, 1998. "Optimal Unemployment Insurance in Search Equilibrium," Working Paper Series 1998:2, Uppsala University, Department of Economics.
    7. 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.
    8. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
    9. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
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