IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence

  • Kroft, Kory
  • Notowidigdo, Matthew J.

We study how optimal unemployment insurance (UI) benefits vary over the business cycle by estimating how the moral hazard cost and the consumption smoothing benefit of UI vary with the unemployment rate. We find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our job search model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the optimal wage replacement rate. We also conduct a model-based estimation of the structural parameters of the model, and we find that virtually all of the cyclical variation in the moral hazard cost and consumption smoothing benefit of UI is due to variation in the responsiveness of search effort as opposed to reservation wages.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.clsrn.econ.ubc.ca/workingpapers/CLSRN%20Working%20Paper%20no.%20104%20-%20Kroft%20and%20Notowidigdo.pdf
Download Restriction: no

Paper provided by Vancouver School of Economics in its series CLSSRN working papers with number clsrn_admin-2012-26.

as
in new window

Length: 55 pages
Date of creation: 29 Oct 2012
Date of revision: 29 Oct 2012
Publication status: Forthcoming in Canadian Labour Market and Skills Researcher Network (CLSRN) Working Paper Series
Handle: RePEc:ubc:clssrn:clsrn_admin-2012-26
Contact details of provider: Web page: http://www.clsrn.econ.ubc.ca/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Torben M. Andersen & Michael Svarer, 2011. "State Dependent Unemployment Benefits," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(2), pages 325-344, 06.
  2. Andersen, Torben M. & Svarer, Michael, 2009. "Business cycle dependent unemployment insurance," Kiel Working Papers 1498, Kiel Institute for the World Economy (IfW).
  3. Raj Chetty, 2005. "A General Formula for the Optimal Level of Social Insurance," NBER Working Papers 11386, National Bureau of Economic Research, Inc.
  4. Feldstein, Martin & Poterba, James, 1984. "Unemployment insurance and reservation wages," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 141-167.
  5. Kroft, Kory, 2008. "Takeup, social multipliers and optimal social insurance," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 722-737, April.
  6. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, 05.
  7. David Card & Raj Chetty & Andrea Weber, 2006. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," NBER Working Papers 12639, National Bureau of Economic Research, Inc.
  8. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
  9. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  10. Rasmus Lentz, 2003. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," CAM Working Papers 2004-10, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  11. Andreas Mueller, 2014. "Separations, Sorting and Cyclical Unemployment," 2014 Meeting Papers 404, Society for Economic Dynamics.
  12. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2013. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics 58321, London School of Economics and Political Science, LSE Library.
  13. Card, David & Levine, Phillip B., 2000. "Extended benefits and the duration of UI spells: evidence from the New Jersey extended benefit program," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 107-138, October.
  14. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
  15. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
  16. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  17. Johannes F. Schmieder† & Till von Wachter & Stefan Bender, 2011. "The Effects Of Extended Unemployment Insurance Over The Business Cycle: Evidence From Regression Discontinuity Estimates Over Twenty Years," Boston University - Department of Economics - Working Papers Series WP2011-063, Boston University - Department of Economics.
  18. Timothy J. Bartik, 2003. "Local Economic Development Policies," Upjohn Working Papers and Journal Articles 03-91, W.E. Upjohn Institute for Employment Research.
  19. Edgerton, Jesse, 2010. "Investment incentives and corporate tax asymmetries," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 936-952, December.
  20. Dale T. Mortensen, 1977. "Unemployment Insurance and Job Search Decisions," ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  21. Mark A. Aguiar & Erik Hurst & Loukas Karabarbounis, 2011. "Time Use During Recessions," NBER Working Papers 17259, National Bureau of Economic Research, Inc.
  22. Michael T. Kiley, 2003. "How should unemployment benefits respond to the business cycle?," Finance and Economics Discussion Series 2003-01, Board of Governors of the Federal Reserve System (U.S.).
  23. Robert Shimer & Ivan Werning, 2006. "Reservation Wages and Unemployment Insurance," NBER Working Papers 12618, National Bureau of Economic Research, Inc.
  24. Martin Browning & Thomas Crossley, 1999. "Unemployment Insurance Benefit Levels and Consumption Changes," CEPR Discussion Papers 405, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  25. Marianne Bertrand, 2004. "From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 723-766, October.
  26. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
  27. Sanchez, Juan M., 2006. "Optimal State-Contingent Unemployment Insurance," MPRA Paper 2535, University Library of Munich, Germany.
  28. Currie, Janet & Gruber, Jonathan, 1996. "Saving Babies: The Efficacy and Cost of Recent Changes in the Medicaid Eligibility of Pregnant Women," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1263-96, December.
  29. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July.
  30. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  31. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle, November.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence (REStud 2016) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:ubc:clssrn:clsrn_admin-2012-26. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Vivian Tran)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.