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Optimal Unemployment Insurance in Search Equilibrium

Peter Fredriksson and Bertil Holmlund

No 1998:2, Working Paper Series from Uppsala University, Department of Economics

Abstract: Should unemployment compensation be paid indefinitely at a fixed rate or should it decline (or increase) over a worker’s unemployment spell? We examine these issues using an equilibrium model of search unemployment. The model features worker-firm bargaining over wages, free entry of new jobs, and endogenous search effort among the unemployed. The main result is that an optimal insurance program implies a declining sequence of unemployment compensation over the spell of unemployment. Numerical calibrations of the model suggest that there are non-trivial welfare gains associated with switching from an optimal uniform benefit structure to an optimally differentiated system.

Keywords: Job search; Unemployment; Unemployment insurance (search for similar items in EconPapers)
JEL-codes: D83 H21 J65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ltv, nep-mic, nep-pbe and nep-pub
Date: 1998-01-19
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Published in Journal of Labor Economics, 2001, pages 370-399.

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