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A Macroeconomic Approach to Optimal Unemployment Insurance: Applications

Camille Landais (), Pascal Michaillat and Emmanuel Saez

American Economic Journal: Economic Policy, 2018, vol. 10, issue 2, 182-216

Abstract: In the United States, unemployment insurance (UI) is more generous when unemployment is high. This paper examines whether this policy is desirable. The optimal UI replacement rate is the Baily-Chetty replacement rate plus a correction term measuring the effect of UI on welfare through labor market tightness. Empirical evidence suggests that tightness is inefficiently low in slumps and inefficiently high in booms, and that an increase in UI raises tightness. Hence, the correction term is positive in slumps but negative in booms, and optimal UI is indeed countercyclical. Since there remains some uncertainty about the empirical evidence, the paper provides a thorough sensitivity analysis.

JEL-codes: E24 E32 J64 J65 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pol.20160462
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Handle: RePEc:aea:aejpol:v:10:y:2018:i:2:p:182-216