Work

A Macroeconomic Approach to Optimal Unemployment Insurance: Theory

Year: 2018

Type: article

Abstract: This paper develops a theory of optimal unemployment insurance (UI) in matching models. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the tradeoff between insurance and job-search incentives, plus a correction term, which is positive when an increase in UI pushes the labor market tightness toward its efficient level. In matching models, most wage mechanisms do not ensure efficiency, so tightness is generally inefficient. The effect of UI on tightness depends on the model: increasing UI may raise tightness by alleviating the rat race for jobs or lower tightness by increasing wages through bargaining. (JEL E24, J22, J23, J31, J41, J64, J65)

Source: American Economic Journal Economic Policy

DOI: 10.1257/pol.20150088

Authors: Camille Landais, Pascal Michaillat, Emmanuel Saez

Institutions: London School of Economics and Political Science, Brown University, University of California, Berkeley

Language: English

Topic: Labor market dynamics and wage inequality

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: bronze