A Macroeconomic Theory of Optimal Unemployment Insurance

55 Pages Posted: 14 Nov 2010 Last revised: 15 Nov 2010

See all articles by Camille Landais

Camille Landais

London School of Economics & Political Science (LSE)

Pascal Michaillat

Brown University - Department of Economics

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: November 2010

Abstract

We develop a theory of optimal unemployment insurance (UI) that accounts for workers’ job-search behavior and firms’ hiring behavior. The optimal replacement rate of UI is the conventional Baily [1978]-Chetty [2006a] rate, which solves the trade-off between insurance and job-search incentives, plus a correction term, which is positive when UI brings the labor market tightness closer to efficiency. For instance, when tightness is inefficiently low, optimal UI is more generous than the Baily-Chetty rate if UI raises tightness and less generous if UI lowers tightness. We propose empirical criteria to determine whether tightness is inefficiently high or low and whether UI raises or lowers tightness. The theory has implications for the cyclicality of optimal UI.

Suggested Citation

Landais, Camille and Michaillat, Pascal and Saez, Emmanuel, A Macroeconomic Theory of Optimal Unemployment Insurance (November 2010). NBER Working Paper No. w16526. Available at SSRN: https://ssrn.com/abstract=1708768

Camille Landais (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Pascal Michaillat

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

HOME PAGE: http://www.pascalmichaillat.org

Emmanuel Saez

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4631 (Phone)
510-642-6615 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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