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Unemployment insurance and home production


  • Taskin, Temel


In this paper, we incorporate home production into a quantitative model of unemployment and show that realistic levels of home production have a significant impact on the optimal unemployment insurance rate. Motivated by recently documented empirical facts, we augment an incomplete markets model of unemployment with a home production technology, which allows unemployed workers to use their extra non-market time as partial insurance against the drop in income due to unemployment. In the benchmark model, we find that the optimal replacement rate in the presence of home production is roughly 40% of wages, which is 40% lower than the no home production model’s optimal replacement rate of 65%. The 40% optimal rate is also close to the estimated rate in practice. The fact that home production makes a significant difference in the optimal unemployment insurance rate is robust to a variety of parameterizations and alternative model environments.

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  • Taskin, Temel, 2011. "Unemployment insurance and home production," MPRA Paper 34878, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:34878

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    References listed on IDEAS

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    Cited by:

    1. Alan B. Krueger & Andreas I. Mueller, 2012. "Time Use, Emotional Well-Being, and Unemployment: Evidence from Longitudinal Data," American Economic Review, American Economic Association, vol. 102(3), pages 594-599, May.
    2. Guler, Bulent & Taskin, Temel, 2013. "Does unemployment insurance crowd out home production?," European Economic Review, Elsevier, vol. 62(C), pages 1-16.
    3. 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.
    4. Mark A. Aguiar & Erik Hurst & Loukas Karabarbounis, 2011. "Time Use During Recessions," NBER Working Papers 17259, National Bureau of Economic Research, Inc.
    5. Mesén Vargas, Juliana & Van der Linden, Bruno, 2017. "Is There Always a Trade-off between Insurance and Incentives? The Case of Unemployment with Subsistence Constraints," IZA Discussion Papers 11034, Institute for the Study of Labor (IZA).

    More about this item


    Unemployment insurance; home production; incomplete markets; self-insurance;

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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