Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings

Abstract

We analyze empirically the optimal mix and optimal generosity of social insurance and assistance programs. For this purpose, we specify a structural life-cycle model of the labor supply and savings decisions of singles and married couples. Partial insurance against wage and employment shocks is provided by social programs, savings, and the labor supplies of all adult household members. We show that the optimal policy mix focuses mainly on social assistance, which guarantees a permanent universal minimum household income, with a minor role for temporary earnings-related unemployment insurance. Optimal social assistance is moderately generous. Reflecting that married couples obtain intra-household insurance by making labor supply choices for both spouses, we also show that the optimal generosity of social assistance is decreasing in the proportion of married individuals in the population.

Keywords: Unemployment insurance; Social assistance; Design of benefit programs; Life-cycle labor supply; Family labor supply; Intra-household insurance; Household savings; Employment risk; Added worker effect

JEL Classification: J18, J68, H21, I38