Blumkin, Tomer, Hadar, Yossi and Yashiv, Eran (2009) The macroeconomic role of unemployment compensation. CEP Discussion Paper, No. 909. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853283423
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The standard motivation for unemployment compensation is consumption smoothing and most papers in the literature have analyzed trade-offs involving consumption smoothing and moral hazard. This paper shows how such policy can increase output by enhancing the assignment of workers to jobs in the face of firm productivity heterogeneity and skill-biased technological change. It shows that in order to do so policy needs to be a function of the properties of the firm’s productivity distribution. The paper undertakes an empiricallygrounded, normative analysis of this issue. The analysis also bears upon the wage distribution, showing how optimal unemployment compensation policy is affected by wages and affects them in turn. A key insight emerging from the analysis is that the degree of firm productivity heterogeneity, in terms of skewness and variance, matters for the design of the time path of unemployment compensation.
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