Unemployment benefits or taxes: How should policy makers redistribute income over the business cycle?

Susanne Ek

No 2012:4, Working Paper Series, Center for Labor Studies from Uppsala University, Department of Economics

Abstract: This paper studies optimal unemployment benefit levels and optimal proportional income tax rates over the business cycle. Previous research suggests that policy makers should make unemployment insurance (UI) dependent on the business cycle because the UI system can be used to smooth consumption across different economic states. However, high benefits increase unemployment. An alternative way to redistribute income is to vary tax rates over the business cycle. In this paper, we develop an equilibrium search and matching model with risk-averse workers and two states, namely, a good and a bad state. The model yields potential ambiguity concerning the welfare effects of business cycle-dependent UI. The model is calibrated to United States (U.S.) labor market data. The numerical results suggest that higher benefits in the bad state are optimal, but the benefit differential is small. A more efficient way for policy makers to redistribute income over the business cycle is to decrease taxes in the bad state. Compared to an optimal uniform system, however, differentiation yields small welfare gains. Nevertheless, imposing two tax rates strictly dominates imposing two benefit levels. This finding is robust to a wide range of sensitivity checks.

Keywords: Job search; business cycles; unemployment insurance; time-varying benefits and taxes (search for similar items in EconPapers)
JEL-codes: E32 H24 J64 J65 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012-01-20
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.ucls.nek.uu.se/digitalAssets/136/136574_20124.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.ucls.nek.uu.se/digitalAssets/136/136574_20124.pdf [301 Moved Permanently]--> https://www.ucls.nek.uu.se/digitalAssets/136/136574_20124.pdf [301 Moved Permanently]--> https://www.uu.se/institution/nationalekonomiska/forskning/forskningscentrum/uppsala-center-for-labor-studies/digitalAssets/136/136574_20124.pdf)

Related works:
Working Paper: Unemployment benefits or taxes: How should policy makers redistribute income over the business cycle? (2012)
Working Paper: Unemployment Benefits or Taxes: How Should Policy Makers Redistribute Income over the Business Cycle? (2012)
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:hhs:uulswp:2012_004

Access Statistics for this paper

More papers in Working Paper Series, Center for Labor Studies from Uppsala University, Department of Economics Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Katarina Grönvall ( this e-mail address is bad, please contact ).