Optimal Unemployment Insurance Research Articles

Employer Screening and Optimal Unemployment Insurance

Abstract Field experiments show that employers are less likely to consider long-term unemployed job-seekers for interviews. We study the implications for optimal unemployment insurance (UI). Based on a structural model of job search and recruitment, estimated with German data, we analyse the optimal two-tier unemployment system. We find that screening makes the optimal initial benefit level four percentage points higher and the potential benefit duration seven months longer. Using an extended Baily-Chetty formula, we study the mechanisms through which screening affects the consumption smoothing gain and moral hazard cost of providing UI and highlight the role of the externality from endogenous firm behaviour.

Optimal unemployment insurance in a THANK model

We characterize optimal unemployment insurance (UI) in a heterogeneous-agent model with unemployment risk and sticky prices. In the long run, the optimal reform calls for a lower replacement rate that raises vacancies and lowers unemployment. In the short run, the optimal reform raises the replacement rate initially to smooth real wage adjustments along the transition and attenuate short-run welfare losses. Once at its optimal level, the replacement rate should vary counter-cyclically in response to demand shocks. Productivity shocks generate quasi-efficient fluctuations and call for a quasi-constant replacement rate. The aggregate welfare gains from an optimal reform are large, around 1% of equivalent consumption. The aggregate welfare gains from an optimal UI policy over the business cycle are smaller, around 0.2%, and essentially vanish with flexible prices because the aggregate demand stabilization motive is muted.

Optimal unemployment insurance with behavioral agents

Abstract This paper studies how behavioral biases affect the optimal unemployment insurance. I revisit the optimal UI of Landais et al. (2018) and show how the optimal UI formula is modified and leads to novel economic insights. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the trade-off between liquidity and job-search incentives, plus a market tightness correction term which shows how welfare is affected by UI through tightness, and plus a behavioral bias correction term, which shows how welfare is affected by UI through job search effort.

Optimal Unemployment Insurance with Program Interactions

Optimal Unemployment Insurance with Program Interactions

Optimal Unemployment Insurance and Costly Self-Control

Optimal Unemployment Insurance and Costly Self-Control

Optimal unemployment insurance in a directed search model

Over recent decades, several economies have experienced changes in the level of aggregate and idiosyncratic volatility. This paper investigates the appropriate labor market policy response to such changes. We introduce unemployment benefits financed by a proportional earnings tax within a model of directed search on the job. The optimal benefit level is hump-shaped as a function of the level of idiosyncratic risk, and the welfare costs of deviating from the optimum are substantial. In contrast, while the optimal generosity of unemployment insurance—which is pro-cyclical—declines with the amount of aggregate risk, the welfare costs of deviating are small.

Moral Hazard, Optimal Unemployment Insurance, and Aggregate Dynamics

Moral Hazard, Optimal Unemployment Insurance, and Aggregate Dynamics

Optimal Automatic Stabilizers

Abstract Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as business cycles that are inefficient due to the presence of matching frictions and nominal rigidities. We derive an augmented Baily–Chetty formula showing that the optimal generosity of the social insurance system depends on a macroeconomic stabilization term. This term pushes for an increase in generosity when the level of economic activity is more responsive to social programmes in recessions than in booms. A calibration to the US economy shows that taking concerns for macroeconomic stabilization into account substantially raises the optimal unemployment insurance replacement rate but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programmes as automatic stabilizers affects their optimal design.

Optimal Unemployment Benefits in the Pandemic

How should unemployment benefits vary in response to the economic crisis induced by the COVID-19 pandemic? We answer this question by computing the optimal unemployment insurance response to the COVID-induced recession.We compare the optimal policy to the provisions under the CARES Act—which substantially expanded unemployment insurance and sparked an ongoing debate over further increases—and several alternative scenarios. We find that it is optimal first to raise unemployment benefits but then to begin lowering them as the economy starts to reopen — despite unemployment remaining high. We also find that the $600 UI supplement payment implemented under CARES was close to the optimal policy. Extending this UI supplement for another six months would hamper the recovery and reduce welfare. On the other hand, a UI extension combined with a re-employment bonus would further increase welfare compared to CARES alone, with only minimal effects on unemployment.

Endogenous censoring in the mixed proportional hazard model with an application to optimal unemployment insurance

SummaryWe examine the sensitivity of estimates of the MPH model with respect to assumptions on the censoring mechanism in the context of an economic model of optimal unemployment insurance. We assume a parametric model for the duration of interest and leave the distribution of censoring unrestricted, allowing it to be correlated with observed and unobserved characteristics. We provide a practical characterization of the identified set with moment inequalities and suggest methods for estimating this set. We apply this approach to estimate the elasticity of unemployment exit rate with respect to unemployment benefit. Finally, we investigate welfare consequences of our estimates.

Optimal unemployment insurance and international risk sharing

If a group of countries were to introduce a common unemployment insurance system, what should it look like? Using a two-country business cycle model with incomplete financial markets and frictional labor markets, we show that the optimal replacement rate becomes more countercyclical relative to a closed economy, due to the planner’s desire for international risk sharing. Moreover, it is feasible to channel cross-country transfers through the unemployment insurance system without affecting unemployment levels. When we calibrate our model to Eurozone data, optimal transfers are sizable and stabilize consumption mainly in the periphery countries, while optimal replacement rates are countercyclical overall.

Optimal unemployment insurance with monitoring

I model job‐search monitoring in the optimal unemployment insurance framework, in which job‐search effort is the worker's private information. In the model, monitoring provides costly information upon which the government conditions unemployment benefits. Using a simple one‐period model with two effort levels, I show analytically that the monitoring precision increases and the utility spread decreases if and only if the inverse of the worker's utility in consumption has a convex derivative. The quantitative analysis that follows extends the model by allowing a continuous effort and separations from employment. That analysis highlights two conflicting economic forces affecting the optimal precision of monitoring with respect to the generosity of the welfare system: higher promised utility is associated not only with a higher cost of moral hazard, but also with lower effort and lower value of employment. The result is an inverse U‐shaped precision profile with respect to promised utility.

A Macroeconomic Approach to Optimal Unemployment Insurance: Theory

This paper develops a theory of optimal unemployment insurance (UI) in matching models. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the tradeoff between insurance and job-search incentives, plus a correction term, which is positive when an increase in UI pushes the labor market tightness toward its efficient level. In matching models, most wage mechanisms do not ensure efficiency, so tightness is generally inefficient. The effect of UI on tightness depends on the model: increasing UI may raise tightness by alleviating the rat race for jobs or lower tightness by increasing wages through bargaining. (JEL E24, J22, J23, J31, J41, J64, J65)

A Macroeconomic Approach to Optimal Unemployment Insurance: Applications

In the United States, unemployment insurance (UI) is more generous when unemployment is high. This paper examines whether this policy is desirable. The optimal UI replacement rate is the Baily-Chetty replacement rate plus a correction term measuring the effect of UI on welfare through labor market tightness. Empirical evidence suggests that tightness is inefficiently low in slumps and inefficiently high in booms, and that an increase in UI raises tightness. Hence, the correction term is positive in slumps but negative in booms, and optimal UI is indeed countercyclical. Since there remains some uncertainty about the empirical evidence, the paper provides a thorough sensitivity analysis. (JEL E24, E32, J64, J65)

Optimal unemployment insurance and redistribution

AbstractWe characterize optimal income taxation and unemployment insurance in a search‐matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals decide whether to participate as job seekers and if so, how much search effort to exert. Unemployment insurance trades off insurance versus search and participation incentives. We also allow for different productivity types so there is a redistributive role for the income tax and show that a piecewise linear wage tax internalizes the macro effects arising from endogenous wages. Type‐specific lump‐sum taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive‐margin optimal redistribution framework where transfers to the involuntarily and voluntarily unemployed can differ, and nests several standard models in the literature.

Fiscal Externalities and Optimal Unemployment Insurance

A common finding of the optimal unemployment insurance (UI) literature is that the optimal replacement rate is around 50 percent; however, a key assumption is that UI is the only government spending activity. I show that optimal UI levels may be dramatically reduced when UI is a small part of overall spending: the negative impact of UI on income tax revenues implies added welfare costs, a mechanism that I call a fiscal externality. Using both a standard calibrated structural job search model and a “sufficient statistics” method, I find that the optimal replacement rate is zero when fiscal externalities are incorporated. (JEL E24, H24, J64, J65)

UI ELIGIBILITY RULE, MORAL HAZARD, AND OPTIMAL UNEMPLOYMENT TRANSFER SCHEME

This paper derives the optimal unemployment insurance (UI) transfer scheme, UI benefits, and UI contribution fees: When a worker has to earn his or her UI eligibility through work, the UI benefits do not last forever, and the UI agency has imperfect monitoring power on the strategic behavior of the worker. We show that the consideration of the UI eligibility rule generates the effective entitlement effect, which serves as an additional incentive device and alters the nature of the optimal UI transfer scheme established in literature. In contrast with previous studies, we find that when the effective entitlement effect is large, it completely removes the moral hazards in job searches, job acceptances, and job quits. As a result, the optimal UI benefits and contribution fees become constant. Calibrated to the data in the United States, the model reproduces some key features of the existing UI system.

Unemployment Insurance and Unemployment Accounts: The Best of Both Worlds

AbstractUnemployment accounts are mandatory individual savings accounts that can be used only during unemployment or retirement. Unlike unemployment insurance, unemployment accounts solve the moral hazard problem but provide no public insurance to workers. I study a hybrid system that borrows from concepts of both unemployment insurance and unemployment accounts, in which workers are mandated to save when employed and can withdraw from the account when unemployed. Once the account is exhausted, the unemployed worker receives unemployment benefits. This hybrid policy provides insurance to workers more efficiently than an unemployment insurance system because it provides government benefits selectively. As a consequence, young workers can reduce their precautionary savings and better smooth their consumption over the life cycle. Calibrating the model to the US economy, I find that, relative to an optimal unemployment insurance system, the optimal hybrid policy leads to a welfare gain of 2.4%, measured as consumption equivalent variation.

Optimal Unemployment Insurance System and its Impact on the Structure of Labor Market in the Republic of Kazakhstan

Optimal Unemployment Insurance System and its Impact on the Structure of Labor Market in the Republic of Kazakhstan

Optimal Unemployment Insurance and International Risk Sharing

We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercyclical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers.