Liquidity and Insurance for the Unemployed

28 Pages Posted: 3 Nov 2005  

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 22, 2008

Abstract

We study the optimal design of unemployment insurance for workers sampling job opportunities over time. We focus on the optimal timing of benefits and the desirability of allowing workers to freely access a riskless asset. When workers have constant absolute risk aversion preferences it is optimal to use a very simple policy: a constant benefit during unemployment, a constant tax during employment that does not depend on the duration of the spell, and free access to savings using a riskless asset. Away from this benchmark, for constant relative risk aversion preferences, the welfare gains of more elaborate policies are minuscule. Our results highlight two largely distinct roles for policy toward the unemployed: (a) ensuring workers have sufficient liquidity to smooth their consumption; and (b) providing unemployment benefits that serve as insurance against the uncertain duration of unemployment spells.

Keywords: optimal unemployment insurance, consumption smoothing, duration of unemployment benefits, sequential search

JEL Classification: D82, J65

Suggested Citation

Werning, Iván and Shimer, Robert, Liquidity and Insurance for the Unemployed (January 22, 2008). MIT Department of Economics Working Paper No. 05-23; American Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=840124

Ivan Werning (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

National Bureau of Economic Research (NBER) ( email )

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Robert J. Shimer

University of Chicago - Department of Economics ( email )

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HOME PAGE: http://home.uchicago.edu/~shimer/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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