Unemployment Insurance in a Life Cycle General Equilibrium Model with Human Capital

We evaluate the welfare gains of extending the duration and increasing the replacement ratio of the current unemployment insurance system in US. To this end, we build a general equilibrium overlapping generations model with on the job human capital accumulation. The model is able, among other things, to match the inequality of outstanding insurance in the economy (through the endogenous wealth distribution). The key features of the model are (i) agents are borrowing constraint, (ii) nding a job requires to exert (unobservable) eort, (iii) nite life span, and (iv) human capital accumulates only while the agent is employed. We nd that, respect to the class of models usually used to study this problem, the last two nobel features substantially increase the welfare gains of more unemployment insurance. The optimal policy prescribes increasing the replacement ratio up to 90% and the duration to 9 months.