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A Quantitative Theory of Time-Consistent Unemployment Insurance

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  • Yun Pei
  • Zoe Xie

Abstract

During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these increases. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these extensions. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. We endogenize a time-consistent UI policy in a stochastic equilibrium search model, where a government without commitment to future policies chooses the UI benefit level and expected duration each period. A longer duration increases the unemployed workers? consumption but reduces their job search incentives, leading to higher future unemployment. We use the framework to evaluate the effects of the 2008-2013 benefit extensions on unemployment and welfare.

Suggested Citation

  • Yun Pei & Zoe Xie, 2016. "A Quantitative Theory of Time-Consistent Unemployment Insurance," FRB Atlanta Working Paper 2016-11, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2016-11
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    Cited by:

    1. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    2. Gustavo de Souza & Andre Luduvice, 2022. "Optimal Unemployment Insurance Requirements," Working Paper Series WP 2022-45, Federal Reserve Bank of Chicago.

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    More about this item

    Keywords

    time-consistent policy; unemployment insurance; labor markets; business cycles;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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