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Optimal Unemployment Insurance

  • Carl Davidson

    (Michigan State University)

  • Stephen A. Woodbury


    (W.E. Upjohn Institute for Employment Research)

We investigate the design of an optimal Unemployment Insurance program using an equilibrium search and matching model calibrated using data from the reemployment bonus experiments and secondary sources. We examine (a) the optimal potential duration of UI benefits, (b) the optimal UI replacement rate when the potential duration of benefits is optimal, and (c) the optimal UI replacement rate when the potential duration of benefits is sub-optimal. There are three main conclusions. First, insurance considerations suggest that the potential duration of UI benefits would be unlimited under an optimal program. Hence, existing UI programs in the U.S. provide benefits for too short a period of time. Second, if the potential duration to benefits were unlimited, current replacement rates in the U.S., which are in the neighborhood of .5, would probably be about right. Third, with the potential duration of benefits limited to 26 weeks, as in most states during normal times, replacement rates of .5 are too low the optimal replacement rate is 1 if the potential duration of benefits is limited to 32 weeks or less.

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Paper provided by W.E. Upjohn Institute for Employment Research in its series Upjohn Working Papers and Journal Articles with number 95-35.

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Date of creation: Apr 1995
Date of revision:
Handle: RePEc:upj:weupjo:95-35
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  1. Abraham, Katharine G, 1983. "Structural-Frictional vs. Deficient Demand Unemployment: Some New Evidence," American Economic Review, American Economic Association, vol. 73(4), pages 708-24, September.
  2. Flemming, J. S., 1978. "Aspects of optimal unemployment insurance : Search, leisure, savings and capital market imperfections," Journal of Public Economics, Elsevier, vol. 10(3), pages 403-425, December.
  3. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
  4. Davidson, Carl & Woodbury, Stephen A, 1993. "The Displacement Effect of Reemployment Bonus Programs," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 575-605, October.
  5. David Card & Phillip B. Levine, 1992. "Unemployment Insurance Taxes and the Cyclical and Seasonal Properties of Unemployment," NBER Working Papers 4030, National Bureau of Economic Research, Inc.
  6. Stephen A. Woodbury, 2009. "Unemployment," Chapters, in: Labor and Employment Law and Economics, chapter 17 Edward Elgar.
  7. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  8. Carl Davidson & Stephen A. Woodbury, 1996. "Unemployment Insurance and Unemployment Implications of the Reemployment Bonus Experiments," Book chapters authored by Upjohn Institute researchers, in: Advisory Council on Unemployment Compensation: Background Papers, volume 3, pages KK1-KK37 W.E. Upjohn Institute for Employment Research.
  9. Phillip B. Levine, 1993. "Spillover effects between the insured and uninsured unemployed," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(1), pages 73-86, October.
  10. Robert S. Chirinko, 1981. "An Empirical Investigation of the Returns to Job Search," Discussion Papers 452, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  12. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  13. Olivier Jean Blanchard & Peter A. Diamond, 1989. "The Aggregate Matching Function," NBER Working Papers 3175, National Bureau of Economic Research, Inc.
  14. Rebecca M. Blank & David Card, 1989. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," NBER Working Papers 2871, National Bureau of Economic Research, Inc.
  15. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
  16. David Card, 1992. "A Comparative Analysis of Unemployment in Canada and the United States," Working Papers 677, Princeton University, Department of Economics, Industrial Relations Section..
  17. Stephen A. Woodbury & Robert G. Spiegelman, . "Bonuses to Workers and Employers to Reduce unemployment: Randomized Trials in Illinois," Upjohn Working Papers and Journal Articles sawrgs1987, W.E. Upjohn Institute for Employment Research.
  18. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
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