Optimal Unemployment Insurance in a Matching Equilibrium

Adrian Masters and Melvyn Coles

Discussion Papers from University at Albany, SUNY, Department of Economics

Abstract: This paper considers the optimal design of unemployment insurance (UI) within an equilibrium matching framework when wages are determined by strategic bargaining. Unlike the Nash bargaining approach, reducing UI payments with duration is welfare increasing. A co-ordinated policy approach, however, one that chooses job creation subsidies and UI optimally, implies a much greater welfare gain than one which considers optimal UI alone. Once job creation subsidies are chosen optimally, the welfare value of making UI payments duration dependent is small.

Date: 2004
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