The Macroeconomic Role of Unemployment Compensation

Tomer Blumkin, Yossi Hadar and Eran Yashiv

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: The standard motivation for unemployment compensation is consumption smoothing andmost papers in the literature have analyzed trade-offs involving consumption smoothing andmoral hazard. This paper shows how such policy can increase output by enhancing theassignment of workers to jobs in the face of firm productivity heterogeneity and skill-biasedtechnological change. It shows that in order to do so policy needs to be a function of theproperties of the firm's productivity distribution. The paper undertakes an empiricallygrounded,normative analysis of this issue. The analysis also bears upon the wagedistribution, showing how optimal unemployment compensation policy is affected by wagesand affects them in turn. A key insight emerging from the analysis is that the degree of firmproductivity heterogeneity, in terms of skewness and variance, matters for the design of thetime path of unemployment compensation.

Keywords: Productivity; heterogeneity; unemployment compensation policy; technologicalchange; assortative matching (search for similar items in EconPapers)
JEL-codes: E24 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab and nep-mac
Date: 2009-02
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0909

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