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A macroeconomic approach to optimal unemployment insurance: applications

Camille Landais, Pascal Michaillat and Emmanuel Saez

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

Abstract: In the United States, unemployment insurance (UI) is more generous when unemployment is high. This paper examines whether this policy is desirable. The optimal UI replacement rate is the Baily-Chetty replacement rate plus a correction term measuring the effect of UI on welfare through labor market tightness. Empirical evidence suggests that tightness is inefficiently low in slumps and inefficiently high in booms, and that an increase in UI raises tightness. Hence, the correction term is positive in slumps but negative in booms, and optimal UI is indeed countercyclical. Since there remains some uncertainty about the empirical evidence, the paper provides a thorough sensitivity analysis.

JEL-codes: J1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias
Date: 2018-05-01
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Published in American Economic Journal: Economic Policy, 1, May, 2018, 10(2), pp. 182-216. ISSN: 1945-7731

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