A Macroeconomic Theory of Optimal Unemployment Insurance

54 Pages Posted: 21 Dec 2014 Last revised: 26 Feb 2015

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)

Date Written: February 25, 2015

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 [2006] 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.

Keywords: unemployment insurance, labor market tightness, matching frictions, business cycles

JEL Classification: E24, E32, H21

Suggested Citation

Landais, Camille and Michaillat, Pascal and Saez, Emmanuel, A Macroeconomic Theory of Optimal Unemployment Insurance (February 25, 2015). Available at SSRN: https://ssrn.com/abstract=2540752 or http://dx.doi.org/10.2139/ssrn.2540752

Camille Landais

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

Pascal Michaillat (Contact Author)

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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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