Optimal Unemployment Insurance in Search Equilibrium

Journal of Labor Economics, Vol. 19, No. 2, pp. 370-399, April 2001

Posted: 17 Nov 2001

See all articles by Peter Fredriksson

Peter Fredriksson

IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Uppsala University - Department of Economics

Bertil Holmlund

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

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Abstract

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

Suggested Citation

Fredriksson, Peter and Holmlund, Bertil, Optimal Unemployment Insurance in Search Equilibrium. Journal of Labor Economics, Vol. 19, No. 2, pp. 370-399, April 2001. Available at SSRN: https://ssrn.com/abstract=279788

Peter Fredriksson

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Uppsala University - Department of Economics ( email )

SE-75120 Uppsala
Sweden
+46 18 471 7079 (Phone)
+46 18 471 1478 (Fax)

Bertil Holmlund (Contact Author)

Uppsala University - Department of Economics ( email )

SE-75120 Uppsala
Sweden
+46 18 471 1122 (Phone)
+46 18 471 1478 (Fax)

HOME PAGE: http://www.nek.uu.se/faculty/holmlund/index.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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