Optimal Unemployment Insurance in an Estimated Job Search Model with Savings
This paper estimates a job search model with savings and determines optimal unemployment benefit policy for the estimated model. For observed and unobserved worker characteristics, the estimation strategy relates observed unemployment spell durations to the model implied unemployment hazard rate. The model is estimated on Danish unemployment spell data which include high quality wealth and income information. The estimation shows that Danish workers respond to changes in economic incentives in ways consistent with the model and that the magnitude of the effect of the responses on the unemployment hazard rate is small. Optimal unemployment benefit level policy is determined as a trade-off between providing insurance against consumption fluctuation and the moral hazard of reducing the worker's incentives to search back into employment. Given the estimated low level of moral hazard, the optimal benefit level is quite high even though workers can self-insure via savings. Depending on the interest rate which is effectively the cost of using savings as self-insurance, the optimal replacement rate ranges between 43% and 82%. The policy analysis emphasizes the importance of including transitional dynamics to avoid a significant downward bias associated with a simple steady state comparison analysis.
|Date of creation:||Mar 2003|
|Contact details of provider:|| Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark|
Phone: (45) 35 32 30 74
Fax: +45 35 32 30 00
Web page: http://www.econ.ku.dk/CAM/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gerard J. van den Berg, 1998.
"Empirical Inference with Equilibrium Search Models of the Labor Market,"
Tinbergen Institute Discussion Papers
98-089/3, Tinbergen Institute.
- van den Berg, Gerard J, 1999. "Empirical Inference with Equilibrium Search Models of the Labour Market," Economic Journal, Royal Economic Society, vol. 109(456), pages 283-306, June.
- Steven Shavell & Laurence Weiss, 1978.
"The Optimal Payment of Unemployment Insurance Benefits over Time,"
Cowles Foundation Discussion Papers
503, Cowles Foundation for Research in Economics, Yale University.
- 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 1347-1362, December.
- Frederiksen, Anders & Graversen, Ebbe K. & Smith, Nina, 2001.
"Overtime Work, Dual Job Holding and Taxation,"
IZA Discussion Papers
323, Institute for the Study of Labor (IZA).
- Frederiksen, A. & Graversen, E.K. & Smith, N., 2001. "Overtime Work, Dual Job Holding and Taxation," Papers 01-7, Aarhus School of Business - Department of Economics.
- Frederiksen, Anders & Graversen, Ebbe Krogh & Smith, Nina, 2001. "Overtime work, dual job holding and taxation," Working Papers 01-7, University of Aarhus, Aarhus School of Business, Department of Economics.
- Heckman, James J. & Singer, Burton, 1984. "Econometric duration analysis," Journal of Econometrics, Elsevier, vol. 24(1-2), pages 63-132.
- JOSEPH Gilles and WEITZENBLUM Thomas, 2001. "Unemployment Insurance and Precautionary Savings : Transitional Dynamics vs. Steady State Equilibrium," Computing in Economics and Finance 2001 96, Society for Computational Economics.
- Eckstein, Zvi & van den Berg, Gerard J, 2004.
"Empirical Labour Search: A Survey,"
CEPR Discussion Papers
4199, C.E.P.R. Discussion Papers.
- Narayana Kocherlakota, 2010.
"Figuring out the impact of hidden savings on optimal unemployment insuranc,"
Levine's Working Paper Archive
506439000000000291, David K. Levine.
- Narayana Kocherlakota, 2004. "Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 541-554, July.
- Daron Acemoglu & Robert Shimer, 1998.
"Efficient Unemployment Insurance,"
NBER Working Papers
6686, National Bureau of Economic Research, Inc.
- S. Rao Aiyagari, 1993.
"Uninsured idiosyncratic risk and aggregate saving,"
502, Federal Reserve Bank of Minneapolis.
- Meyer, Bruce D, 1990.
"Unemployment Insurance and Unemployment Spells,"
Econometric Society, vol. 58(4), pages 757-782, July.
- Gary D. Hansen & Ayse Imrohoroglu, 1990.
"The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard,"
UCLA Economics Working Papers
583, UCLA Department of Economics.
- Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-142, February.
- Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
- Yann Algan & Arnaud Cheron & Jean-Olivier Hairault & Francois Langot, 2003. "Wealth Effect on Labor Market Transitions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 156-178, January.
- Robert Shimer & Ivan Werning, 2008.
"Liquidity and Insurance for the Unemployed,"
American Economic Review,
American Economic Association, vol. 98(5), pages 1922-1942, December.
- Flemming, J. S., 1978. "Aspects of optimal unemployment insurance : Search, leisure, savings and capital market imperfections," Journal of Public Economics, Elsevier, vol. 10(3), pages 403-425, December.
- Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997.
"Optimal Unemployment Insurance,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 412-438, April.
- Lars Ljungqvist & Thomas Sargent, 1999. "Matlab code for Hopenhayn-Nicolini's optimal unemployment insurance model," QM&RBC Codes 18, Quantitative Macroeconomics & Real Business Cycles.
- Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
- 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.
- Williamson, Stephen D. & Wang, Cheng, 1999. "Moral Hazard, Optimal Unemployment Insurance, and Experience Rating," Working Papers 99-03, University of Iowa, Department of Economics.
- Wang, Cheng & Williamson, Stephen D., 2002. "Moral Hazard, Optimal Unemployment Insurance and Experience Rating," Staff General Research Papers Archive 10133, Iowa State University, Department of Economics.
- Rasmus Lentz & Torben Tranas, 2005.
"Job Search and Savings: Wealth Effects and Duration Dependence,"
Journal of Labor Economics,
University of Chicago Press, vol. 23(3), pages 467-490, July.
- Rasmus Lentz & Torben Tranæs, 2002. "Job Search and Savings: Wealth Effects and Duration Dependence," CAM Working Papers 2004-11, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics, revised Nov 2003.
- Rasmus Lenz & Torben Tranæs, "undated". "Job Search and Savings: Wealth Effects and Duration Dependence," EPRU Working Paper Series 01-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Rasmus Lentz & Torben Tranaes, 2001. "Job Search and Savings: Wealth Effects and Duration Dependence," CESifo Working Paper Series 461, CESifo Group Munich.
- Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
When requesting a correction, please mention this item's handle: RePEc:kud:kuieca:2004_10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann)
If references are entirely missing, you can add them using this form.