Liquidity and Insurance for the Unemployed

Robert Shimer and Iván Werning

No 11689, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the optimal design of unemployment insurance for workers sampling job opportunities over time. We focus on the timing of benefits and the desirability of allowing workers to freely access a riskless asset. When workers have constant absolute risk aversion preferences, a very simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to savings using the riskless asset. Away from this benchmark, for constant relative risk aversion preferences, the optimal policy involves nearly constant benefits and the welfare gains from more elaborate policies are minuscule. Our results highlight two distinct roles for policy toward the unemployed: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies that serve as insurance against the uncertain duration of unemployment spells.

JEL-codes: D82 J65 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-ias and nep-lab
Note: EFG LS PE
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Citations: View citations in EconPapers (25)

Published as Shimer, Robert and Ivan Werning. “Liquidity and Insurance for the Unemployed.” American Economic Review 98, 5 (2008): 1922–1942.

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Journal Article: Liquidity and Insurance for the Unemployed (2008)
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