Abstract
In this article, I quantitatively investigate the business cycle properties of the Canadian unemployment insurance system, Employment Insurance (EI). EI is designed in such a way that the generosity of benefits depends on regional labour market conditions and thus varies over time with the state of the macro economy as well as geographically depending on local unemployment rates. Simulations of a life-cycle model with heterogeneous agents and search frictions show that the welfare impact of the temporal changes in EI generosity is extremely small. It is dominated by the distributional effects of regional differentiation—that is, regions with persistently high unemployment rates benefit from more generous EI benefits because they are subsidized by regions with low unemployment.
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