Optimal unemployment insurance in a life cycle model

Thepthida Sopraseuth, Sébastien Ménard, Francois Langot and Jean-Olivier Hairault

No 422, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: We extend Hopenhayn and Nicolini's [1997] optimal unemployment contracts by including life-cycle features. We show that it is optimal to implement an age-dependant contract. Indeed, the elderly have only a few years left on the labor market prior to retirement. The short horizon of old workers implies a more digressive replacement ratio. The introduction of a wage tax after re-employment allows to smooth the unemployment benefit profile. Nevertheless, such a tax is less efficient than in Hopenhayn and Nicolini's [1997] paper due to the short horizon of old workers on the labor market. Consequently, we propose to adopt a global approach in our analysis by determining the optimal unemployment insurance and retirement pension. In that case, when an unemployed worker retires, the pension decreases with the length of the last unemployment spell. We then show that the integration of these two social programs (unemployment and retirement) is more efficient in increasing the employment rate and decreasing the cost of insurance programs.

Date: 2007
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