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Home Production and the Optimal Rate of Unemployment Insurance

Author

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  • Temel Taskin

Abstract

In this paper, we incorporate home production into a quantitative model of unemployment and show that realistic levels of home production have a signifi- cant impact on the optimal unemployment insurance rate. Motivated by recently documented empirical facts, we augment an incomplete markets model of unem- ployment 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.

Suggested Citation

  • Temel Taskin, 2012. "Home Production and the Optimal Rate of Unemployment Insurance," Working Papers 1220, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:1220
    as

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    File URL: http://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2012/12-20
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Home Production and the Optimal Rate of Unemployment Insurance
      by Christian Zimmermann in NEP-DGE blog on 2012-09-05 18:33:18

    Citations

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    Cited by:

    1. 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.
    2. Scott Ross Baker & Contantine Yannelis, 2017. "Income Changes and Consumption: Evidence from the 2013 Federal Government Shutdown," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 99-124, January.

    More about this item

    Keywords

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

    JEL classification:

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

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