A Macroeconomic Approach to Optimal Unemployment Insurance: Applications
American Economic Journal: Economic Policy
vol. 10,
no. 2, May 2018
(pp. 182-216)
Abstract
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.Citation
Landais, Camille, Pascal Michaillat, and Emmanuel Saez. 2018. "A Macroeconomic Approach to Optimal Unemployment Insurance: Applications." American Economic Journal: Economic Policy, 10 (2): 182-216. DOI: 10.1257/pol.20160462Additional Materials
JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E32 Business Fluctuations; Cycles
- J64 Unemployment: Models, Duration, Incidence, and Job Search
- J65 Unemployment Insurance; Severance Pay; Plant Closings
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