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How Should Unemployment Insurance Vary over the Business Cycle?

Serdar Birinci () and Kurt See ()

Staff Working Papers from Bank of Canada

Abstract: We study optimal unemployment insurance (UI) policy over the business cycle, using a heterogeneous agent job-search model with aggregate risk and incomplete markets. We validate the model-implied micro and macro labor market elasticities to changes in the generosity of UI benefits against existing estimates and we reconcile divergent empirical findings. We show that generating the observed demographic differences between UI recipients and non-recipients is critical for determining the magnitudes of these elasticities. We find that the optimal UI policy features countercyclical replacement rates with an average generosity that is close to current U.S. policy but that it adopts drastically longer payment durations reminiscent of European policies.

Keywords: Business fluctuations and cycles; Fiscal policy; Labour markets (search for similar items in EconPapers)
JEL-codes: E32 J65 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2020-11
New Economics Papers: this item is included in nep-dge, nep-ias, nep-lab and nep-mac
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Working Paper: How Should Unemployment Insurance vary over the Business Cycle? (2018) Downloads
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