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

Kory Kroft and Matthew Notowidigdo

CLSSRN working papers from Vancouver School of Economics

Abstract: We study how optimal unemployment insurance (UI) benefits vary over the business cycle by estimating how the moral hazard cost and the consumption smoothing benefit of UI vary with the unemployment rate. 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 job search 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 optimal wage replacement rate. We also conduct a model-based estimation of the structural parameters of the model, and we find that virtually all of the cyclical variation in the moral hazard cost and consumption smoothing benefit of UI is due to variation in the responsiveness of search effort as opposed to reservation wages.

Keywords: Unemployment Insurance; Business Cycle; Moral Hazard; Consumption Smoothing (search for similar items in EconPapers)
JEL-codes: H5 J64 J65 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2012-10-29, Revised 2012-10-29
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Forthcoming in Canadian Labour Market and Skills Researcher Network (CLSRN) Working Paper Series

Downloads: (external link)
http://www.clsrn.econ.ubc.ca/workingpapers/CLSRN%2 ... nd%20Notowidigdo.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

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 (2011)
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:ubc:clssrn:clsrn_admin-2012-26

Access Statistics for this paper

More papers in CLSSRN working papers from Vancouver School of Economics
Bibliographic data for series maintained by Vivian Tran ( this e-mail address is bad, please contact ).