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Should Unemployment Insurance Vary With the Unemployment Rate? Theory and Evidence

Listed author(s):
  • Kory Kroft
  • Matthew J. Notowidigdo

We study how the level of unemployment insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, we find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate.

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File URL: http://www.nber.org/papers/w17173.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17173.

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Date of creation: Jun 2011
Publication status: published as Kory Kroft & Matthew J. Notowidigdo, 2016. "Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence," The Review of Economic Studies, vol 83(3), pages 1092-1124.
Handle: RePEc:nbr:nberwo:17173
Note: LS PE
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