Optimal Unemployment Insurance over the Business Cycle

Camille Landais, Pascal Michaillat and Emmanuel Saez

No 1303, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: This paper analyzes optimal unemployment insurance (UI) over the business cycle. We consider a general matching model of the labor market. For a given UI, the economy is efficient if tightness satisfies a generalized Hosios condition, slack if tightness is too low, and tight if tightness is too high. The optimal UI formula is the sum of the standard Baily-Chetty term, which trades off search incentives and insurance, and an externality-correction term, which is positive if UI brings the economy closer to efficiency and negative otherwise. Our formula therefore deviates from the Baily-Chetty formula when the economy is inefficient and UI affects labor market tightness. In a model with rigid wages and concave production function, UI increases tightness; hence, UI should be more generous than in the Baily-Chetty formula when the economy is slack, and less generous otherwise. In contrast, in a model with linear production function and Nash bargaining, UI increases wages and reduces tightness; hence, UI should be less generous than in the Baily-Chetty formula when the economy is slack, and more generous otherwise. Deviations from the Baily-Chetty formula can be quantitatively large using realistic empirical parameters.

Keywords: Business Cycle; Unemployment Insurance (search for similar items in EconPapers)
JEL-codes: E24 E27 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013-10
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Optimal unemployment insurance over the business cycle (2013)
Working Paper: Optimal Unemployment Insurance Over the Business Cycle (2011)
Working Paper: Optimal Unemployment Insurance over the Business Cycle (2011)
Working Paper: Optimal Unemployment Insurance over the Business Cycle (2010)
Working Paper: Optimal unemployment insurance over the business cycle (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:1303

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