Fiscal Externalities and Optimal Unemployment Insurance

Nicholas Lawson

American Economic Journal: Economic Policy, 2017, vol. 9, issue 4, 281-312

Abstract: A common finding of the optimal unemployment insurance (UI) literature is that the optimal replacement rate is around 50 percent; however, a key assumption is that UI is the only government spending activity. I show that optimal UI levels may be dramatically reduced when UI is a small part of overall spending: the negative impact of UI on income tax revenues implies added welfare costs, a mechanism that I call a fiscal externality. Using both a standard calibrated structural job search model and a "sufficient statistics" method, I find that the optimal replacement rate is zero when fiscal externalities are incorporated.

JEL-codes: E24 H24 J64 J65 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/pol.20140396
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Fiscal Externalities and Optimal Unemployment Insurance (2013)
Working Paper: Fiscal Externalities and Optimal Unemployment Insurance (2013)
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