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Optimal unemployment insurance in a life cycle model


  • Theptida Sopraseuth


  • Sebastien Menard


  • Francois Langot


  • Jean-Olivier Hairault

    (Universite Paris 1)


We extend Hopenhayn and Nicolini's [1997] optimal unemployment contracts by including life-cycle features. We show that it is optimal to implement an age-dependant contract. Indeed, the elderly have only a few years left on the labor market prior to retirement. The short horizon of old workers implies a more digressive replacement ratio. The introduction of a wage tax after re-employment allows to smooth the unemployment benefit profile. Nevertheless, such a tax is less efficient than in Hopenhayn and Nicolini's [1997] paper due to the short horizon of old workers on the labor market. Consequently, we propose to adopt a global approach in our analysis by determining the optimal unemployment insurance and retirement pension. In that case, when an unemployed worker retires, the pension decreases with the length of the last unemployment spell. We then show that the integration of these two social programs (unemployment and retirement) is more efficient in increasing the employment rate and decreasing the cost of insurance programs.

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  • Theptida Sopraseuth & Sebastien Menard & Francois Langot & Jean-Olivier Hairault, 2007. "Optimal unemployment insurance in a life cycle model," 2007 Meeting Papers 422, Society for Economic Dynamics.
  • Handle: RePEc:red:sed007:422

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    References listed on IDEAS

    1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    2. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    3. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, July.
    4. Gomes, Joao & Greenwood, Jeremy & Rebelo, Sergio, 2001. "Equilibrium unemployment," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 109-152, August.
    5. Rudanko, Leena, 2009. "Labor market dynamics under long-term wage contracting," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 170-183, March.
    6. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    7. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
    8. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
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