Should Unemployment Insurance Vary With the Unemployment Rate? Theory and Evidence

Kory Kroft and Matthew Notowidigdo

No 17173, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how the level of unemployment insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, we find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate.

JEL-codes: H5 J64 J65 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-cta, nep-ias and nep-lab
Note: LS PE
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Published as Kory Kroft & Matthew J. Notowidigdo, 2016. "Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence," The Review of Economic Studies, vol 83(3), pages 1092-1124.

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Related works:
Journal Article: Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence (2016)
Working Paper: Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence (2012)
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