On the Optimal Timing of Benefits with Heterogeneous Workers And Human Capital Depreciation

31 Pages Posted: 26 Apr 2006

See all articles by Robert Shimer

Robert Shimer

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

Iván Werning

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

Date Written: April 25, 2006

Abstract

This paper studies the optimal timing of unemployment insurance subsidies in a McCall search model. Risk-averse workers sequentially sample random job opportunities. Our model distinguishes unemployment subsidies from consumption during unemployment by allowing workers to save and borrow freely. When the insurance agency faces a group of homogeneous workers solving stationary search problems, the optimal subsidies are independent of unemployment duration. In contrast, when workers are heterogeneous or when human capital depreciates during the spell, the optimal subsidy is no longer constant. We explore the main determinants of the shape of the optimal subsidy schedule, isolating forces for subsidies to optimally rise or fall with duration.

Keywords: unemployment insurance, liquidity, search

JEL Classification: J6

Suggested Citation

Shimer, Robert J. and Werning, Ivan, On the Optimal Timing of Benefits with Heterogeneous Workers And Human Capital Depreciation (April 25, 2006). MIT Department of Economics Working Paper No. 06-12, Available at SSRN: https://ssrn.com/abstract=899003 or http://dx.doi.org/10.2139/ssrn.899003

Robert J. Shimer

University of Chicago - Department of Economics ( email )

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

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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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