How should unemployment benefits respond to the business cycle?

Michael Kiley

No 2003-01, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Unemployment insurance programs balance the benefits of consumption smoothing for unemployed workers against the disincentive effects of unemployment benefits. Such a balancing of benefits and costs is likely sensitive to the cyclical state of the economy, and hence the generosity of benefits should also respond to the cyclical state of the economy. The nature of such responses in an optimal unemployment insurance (UI) program is analyzed in a simple model. The results suggest that an optimal UI program would increase the initial level of benefits and probably extend higher benefits over time in response to a recessionary shock. A simple extension of benefits, such as exists automatically in the system in the United States, provides both poorer insurance and poorer incentives than the optimal program, and does so at a higher cost. Moreover, the current UI system in the U.S. provides a substantially higher level of welfare to workers who lose jobs during tight labor markets.

Keywords: Unemployment; insurance (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2003/200301/200301abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2003/200301/200301pap.pdf (application/pdf)

Related works:
Journal Article: How Should Unemployment Benefits Respond to the Business Cycle? (2003)
Working Paper: How Should Unemployment Benefits Respond to the Business Cycle? (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2003-01

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().