Optimal Unemployment Insurance in Search Equilibrium
Journal of Labor Economics, Vol. 19, No. 2, pp. 370-399, April 2001
Posted: 17 Nov 2001
Should unemployment benefits be paid indefinitely at a fixed rate, or should it decline (or increase) over a worker's unemployment spell? We examine these issues using an equilibrium model of search unemployment. The model features worker-firm bargaining over wages, free entry of new jobs, and endogenous search effort among the unemployed. The main result is that an optimal insurance program implies a declining benefit sequence over the spell of unemployment. Numerical calibrations of the model suggest that there may be non-trivial welfare gains associated with switching from an optimal uniform benefit structure to an optimally differentiated system.
Keywords: Job search, unemployment, unemployment insurance
JEL Classification: J64, J65, H21, D8
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