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 (UI) over the business cycle. We consider a general matching model of the labor market. For a given UI, the economy is efficient if tightness satisfies a generalized Hosios condition, slack if tightness is too low, and tight if tightness is too high. The optimal UI formula is the sum of the standard Baily-Chetty term, which trades off search incentives and insurance, and an externality-correction term, which is positive if UI brings the economy closer to efficiency and negative otherwise. Our formula therefore deviates from the Baily-Chetty formula when the economy is inefficient and UI affects labor market tightness. In a model with rigid wages and concave production function, UI increases tightness; hence, UI should be more generous than in the Baily-Chetty formula when the economy is slack, and less generous otherwise. In contrast, in a model with linear production function and Nash bargaining, UI increases wages and reduces tightness; hence, UI should be less generous than in the Baily-Chetty formula when the economy is slack, and more generous otherwise. Deviations from the Baily-Chetty formula can be quantitatively large using realistic empirical parameters.

JEL-codes: J01 N0 R14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013-08-19
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (29)

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http://eprints.lse.ac.uk/58321/ 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 (2011)
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:ehl:lserod:58321

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