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How Should Unemployment Insurance vary over the Business Cycle?

Author

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  • Serdar Birinci

    (University of Minnesota)

  • Kurt Gerrard See

    (University of Minnesota)

Abstract

We study optimal unemployment insurance (UI) over the business cycle using a tractable heterogeneous agent job search model that features labor productivity driven business cycles and incomplete asset markets, and find that UI policy should be countercyclical. In this framework, besides providing consumption insurance upon job loss, generous UI payments allow individuals to maintain similar consumption levels even during recessions, when they would otherwise have had to accumulate savings by reducing consumption. Moreover, the presence of borrowing constraints disciplines the unemployed’s job search behavior, thus offsetting some of the moral hazard costs introduced by the generous UI payments in downturns. Even when the opportunity cost of employment is set to be high, these channels remain active to preserve the countercyclicality of the optimal UI policy.

Suggested Citation

  • Serdar Birinci & Kurt Gerrard See, 2018. "How Should Unemployment Insurance vary over the Business Cycle?," 2018 Meeting Papers 69, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:69
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    References listed on IDEAS

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