A Macroeconomic Theory of Optimal Unemployment Insurance

55 Pages Posted: 29 Aug 2021

See all articles by Camille Landais

Camille Landais

London School of Economics & Political Science (LSE) - London School of Economics; Centre for Economic Policy Research (CEPR)

Pascal Michaillat

Brown University

Emmanuel Saez

University of California, Berkeley

Date Written: November 2010

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 [2006a] 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.

Suggested Citation

Landais, Camille and Michaillat, Pascal and Saez, Emmanuel, A Macroeconomic Theory of Optimal Unemployment Insurance (November 2010). NBER Working Paper No. w16526, Available at SSRN: https://ssrn.com/abstract=3913445

Camille Landais (Contact Author)

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

United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Pascal Michaillat

Brown University

Box 1860
Providence, RI 02912
United States

Emmanuel Saez

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

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