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Business Cycle Dependent Unemployment Insurance

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  • Andersen, Torben M.

    (Aarhus University)

  • Svarer, Michael

    (Aarhus University)

Abstract

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 there may also be an incentive argument. Since benefits may be less distortionary in a recession than a boom, it follows that counter-cyclical benefits reduce average distortions compared to state independent benefits. We show that optimal (utilitarian) benefits are counter-cyclical and may reduce the structural (average) unemployment rate, although the variability of unemployment may increase.

Suggested Citation

  • Andersen, Torben M. & Svarer, Michael, 2010. "Business Cycle Dependent Unemployment Insurance," IZA Discussion Papers 5196, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp5196
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    1. > Labor Economics > Unemployment Insurance > Optimal Unemployment Insurance

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    Cited by:

    1. Kurt Mitman & Stanislav Rabinovich, 2011. "Pro-Cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model," PIER Working Paper Archive 11-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
    3. Torben M. Andersen, 2014. "Tuning unemployment insurance to the business cycle," IZA World of Labor, Institute of Labor Economics (IZA), pages 1-54, May.
    4. Pollak, Andreas, 2013. "Employment Insurance and the Business Cycle," MPRA Paper 49358, University Library of Munich, Germany.
    5. Andersen, Torben M. & Kristoffersen, Mark Strøm & Svarer, Michael, 2018. "Benefit reentitlement conditions in unemployment insurance schemes," Labour Economics, Elsevier, vol. 52(C), pages 27-39.
    6. Moyen, Stéphane & Stähler, Nikolai, 2014. "Unemployment Insurance And The Business Cycle: Should Benefit Entitlement Duration React To The Cycle?," Macroeconomic Dynamics, Cambridge University Press, vol. 18(3), pages 497-525, April.
    7. Kory Kroft & Matthew J. Notowidigdo, 2016. "Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 1092-1124.
    8. Eduardo Ignacio Polo-Muro, 2021. "The effect of labor market shocks on mental health outcomes: evidence from the Spanish Great Recession," Working Papers 21.08, Universidad Pablo de Olavide, Department of Economics.
    9. 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.
    10. Torben Andersen, 2010. "Unemployment Persistence," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(1), pages 23-28, April.

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    More about this item

    Keywords

    unemployment benefits; business cycle; insurance; incentives;
    All these keywords.

    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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