Optimal Unemployment Insurance Over the Business Cycle

Camille Landais, Pascal Michaillat and Emmanuel Saez

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper characterizes optimal unemployment insurance (UI) over the business cycle using a model of equilibrium unemployment in which jobs are rationed in recession. It offers a simple optimal UI formula that can be applied to a broad class of equilibrium unemployment models. In addition to the usual statistics (risk aversion and micro-elasticity of unemployment with respect to UI), a macro-elasticity appears in the formula to capture the macroeconomic impact of UI on unemployment. In a model with job rationing, the formula implies that optimal UI is countercyclical. This result arises because in recession, jobs are lacking irrespective of job search. Therefore (1) a higher aggregate search effort cannot reduce aggregate unemployment much; and (2) individual search effort creates a negative externality by reducing other jobseekers' probability of finding a job as in a rat race. Hence the social benefits of job search are low. In a calibrated model, optimal UI increases significantly in recession. This quantitative result holds whether the government adjusts the level or duration of benefits; whether it balances its budget each period or uses deficit spending.

Keywords: Unemployment insurance; business cycle; job rationing; matching frictions (search for similar items in EconPapers)
JEL-codes: E24 E32 H21 H23 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-dge, nep-ias, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (61)

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https://cep.lse.ac.uk/pubs/download/dp1078.pdf (application/pdf)

Related works:
Working Paper: Optimal Unemployment Insurance over the Business Cycle (2013)
Working Paper: Optimal unemployment insurance over the business cycle (2013)
Working Paper: Optimal Unemployment Insurance over the Business Cycle (2011)
Working Paper: Optimal Unemployment Insurance over the Business Cycle (2010)
Working Paper: Optimal unemployment insurance over the business cycle (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp1078

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