A Macroeconomic Approach to Optimal Unemployment Insurance: Theory

Camille Landais, Pascal Michaillat and Emmanuel Saez

American Economic Journal: Economic Policy, 2018, vol. 10, issue 2, 152-81

Abstract: This paper develops a theory of optimal unemployment insurance (UI) in matching models. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the tradeoff between insurance and job-search incentives, plus a correction term, which is positive when an increase in UI pushes the labor market tightness toward its efficient level. In matching models, most wage mechanisms do not ensure efficiency, so tightness is generally inefficient. The effect of UI on tightness depends on the model: increasing UI may raise tightness by alleviating the rat race for jobs or lower tightness by increasing wages through bargaining.

JEL-codes: E24 J22 J23 J31 J41 J64 J65 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pol.20150088
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Citations: View citations in EconPapers (131)

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