Optimal Unemployment Insurance in Search Equilibrium

Uppsala Univ. Dept. of Economics WP 1998:2

34 Pages Posted: 25 Mar 1998

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 1998

Abstract

Should unemployment compensation 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 sequence of unemployment compensation over the spell of unemployment. Numerical calibrations of the model suggest that there are non-trivial welfare gains associated with switching from an optimal uniform benefit structure to an optimally differentiated system.

JEL Classification: J64, J65, H21, D8

Suggested Citation

Fredriksson, Peter and Holmlund, Bertil, Optimal Unemployment Insurance in Search Equilibrium (January 19, 1998). Uppsala Univ. Dept. of Economics WP 1998:2. Available at SSRN: https://ssrn.com/abstract=67509 or http://dx.doi.org/10.2139/ssrn.67509

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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