Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence

51 Pages Posted: 5 Jul 2011 Last revised: 5 Jun 2022

See all articles by Kory Kroft

Kory Kroft

University of Toronto

Matthew Notowidigdo

University of Chicago - Booth School of Business

Date Written: June 2011

Abstract

We study how the level of unemployment insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, we find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate.

Suggested Citation

Kroft, Kory and Notowidigdo, Matthew, Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence (June 2011). NBER Working Paper No. w17173, Available at SSRN: https://ssrn.com/abstract=1879035

Kory Kroft (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

Matthew Notowidigdo

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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