OPTIMAL UNEMPLOYMENT INSURANCE, WITH HUMAN CAPITAL DEPRECIATION, AND DURATION DEPENDENCE

Nicola Pavoni

International Economic Review, 2009, vol. 50, issue 2, pages 323-362

Abstract: This article introduces the possibility of a deterioration in job opportunities during unemployment into the standard optimal unemployment insurance (UI) design framework and characterizes the efficient UI scheme. The optimal program may display two novel features, which cannot be present in stationary models. First, UI transfers are bounded below by a minimal "assistance" level that arises endogenously in the efficient contract. Second, the optimal scheme implies a "wage subsidy" for long-term unemployed workers. Numerical simulations based on the Spanish and U.S. economies suggest that both assistance transfers and wage subsidies should be part of the UI scheme in these countries. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2009

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