Landais, Camille, Michaillat, Pascal and Saez, Emmanuel (2013) Optimal unemployment insurance over the business cycle. CFM discussion paper series, CFM-DP2013-3. Centre For Macroeconomics , London, UK.
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Abstract
This paper analyzes optimal unemployment insurance (UI) over the business cycle. We consider a general matching model of the labor market. For a given UI, the economy is efficient if tightness satisfies a generalized Hosios condition, slack if tightness is too low, and tight if tightness is too high. The optimal UI formula is the sum of the standard Baily-Chetty term, which trades off search incentives and insurance, and an externality-correction term, which is positive if UI brings the economy closer to efficiency and negative otherwise. Our formula therefore deviates from the Baily-Chetty formula when the economy is inefficient and UI affects labor market tightness. In a model with rigid wages and concave production function, UI increases tightness; hence, UI should be more generous than in the Baily-Chetty formula when the economy is slack, and less generous otherwise. In contrast, in a model with linear production function and Nash bargaining, UI increases wages and reduces tightness; hence, UI should be less generous than in the Baily-Chetty formula when the economy is slack, and more generous otherwise. Deviations from the Baily-Chetty formula can be quantitatively large using realistic empirical parameters.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://www.centreformacroeconomics.ac.uk/Home.aspx |
| Additional Information: | © 2013 The Authors |
| Library of Congress subject classification: | H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor |
| Sets: | Research centres and groups > Centre for Macroeconomics |
| Identification Number: | CFM-DP2013-3 |
| Funders: | Center for Equitable Growth, UC Berkeley |
| Date Deposited: | 28 Jul 2014 09:10 |
| URL: | http://eprints.lse.ac.uk/58321/ |
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