Optimal unemployment insurance over the business cycle

Camille Landais, Pascal Michaillat and Emmanuel Saez

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper analyzes optimal unemployment insurance over the business cycle in a search model in which unemployment stems from matching frictions (in booms) and job rationing (in recessions). Job rationing during recessions introduces two novel effects ignored in previous studies of optimal unemployment insurance. First, job-search efforts have little effect on aggregate unemployment because the number of jobs available is limited, independently of matching frictions. Second, while job-search efforts increase the individual probability of finding a job, they create a negative externality by reducing other jobseekers’ probability of finding one of the few available jobs. Both effects are captured by the positive and countercyclical wedge between micro-elasticity and macro-elasticity of unemployment with respect to net rewards from work. We derive a simple optimal unemployment insurance formula expressed in terms of those two elasticities and risk aversion. The formula coincides with the classical Baily-Chetty formula only when unemployment is low, and macro- and micro-elasticity are (almost) equal. The formula implies that the generosity of unemployment insurance should be countercyclical. We illustrate this result by simulating the optimal unemployment insurance over the business cycle in a dynamic stochastic general equilibrium model calibrated with US data.

JEL-codes: E24 E32 H21 H23 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2010-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (87)

Downloads: (external link)
http://eprints.lse.ac.uk/35596/ Open access version. (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 (2011)
Working Paper: Optimal Unemployment Insurance over the Business Cycle (2010)
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