Business Cycle Dependent Unemployment Insurance

Torben M Andersen and Michael Svarer ()

No 7334, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The consequences of business cycle contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between "good" and "bad" states of nature. We show that not only is there an insurance argument for such contingencies, but also an incentive argument. If benefits are less distortionary in a recession than a boom, it follows that countercyclical benefits reduce average distortions compared to state independent benefits. We show that optimal benefits are state contingent and tend to reduce the structural (average) unemployment rate, although the variability of unemployment may increase.

Keywords: business cycle; incentives; insurance; unemployment benefits, (search for similar items in EconPapers)
JEL-codes: H4 J6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias and nep-lab
Date: 2009-06

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Working Paper: Business Cycle Dependent Unemployment Insurance (2009)
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