Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-01T21:25:46.809Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL UNEMPLOYMENT INSURANCE: HOW IMPORTANT IS THE DEMAND SIDE?

Published online by Cambridge University Press:  25 May 2016

Rune Vejlin
Rune Vejlin*
Affiliation:
Aarhus University and IZA
*
Address correspondence to: Rune Vejlin, Department of Economics and Business, Aarhus University, Nordre Ringgade 1, DK-8000 Aarhus C, Denmark; e-mail: rvejlin@econ.au.dk.
Get access Rights & Permissions [Opens in a new window]

Abstract

I develop and calibrate an equilibrium search model with endogenous savings and search intensity. The wage is endogenized using Nash bargaining and the number of vacancies is tied down by a free entry condition. This allows me to conduct a counterfactual analysis of the optimal unemployment insurance (UI) level. The provision of UI is motivated by the worker's inability to perfectly insure against income shocks, but at the same time UI introduces distortions into workers' search intensity decisions and firm vacancy creation. I find that equilibrium effects are important. When the UI level is raised 25%, they constitute around one-third of the increase in total unemployment. However, even with limited savings by workers, optimal UI is close to zero. It is further shown that ignoring the possibility of self-insurance greatly affects the optimal UI level.

Keywords

DMP ModelOptimal Unemployment InsuranceEndogenous SavingMoral Hazard
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 8 , December 2017 , pp. 2070 - 2095
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I would like to thank Rasmus Lentz for getting me started on this project, and for many helpful suggestions. This work was partly done while I was visiting the University of Wisconsin–Madison; their hospitality is greatly acknowledged. I would like to thank Jesper Bagger, Francois Fontaine, Mark Kristoffersen, Jeremy Lise, Dale Mortensen, Michael Svarer, and Chris Taber and participants at the 2012 SOLE meeting for valuable comments. I would also like to thank the anonymous associated editor and two anonymous referees for helping me substantially improve the paper. Any errors are my own.

References

REFERENCES

Acemoglu, D. and Shimer, R. (1999) Efficient unemployment insurance. Journal of Political Economy 107 (5), 893–928.Google Scholar
Algan, Y., Cheron, A., Hairault, J.-O., and Langot, F. (2003) Wealth effect on labor market transitions. Review of Economic Dynamics 6, 156–178.Google Scholar
Andersen, T.M. and Svarer, M. (2014) The role of workfare in striking a balance between incentives and insurance in the labour market. Economica 81 (321), 86–116.Google Scholar
Bloemen, H.G. and Stancanelli, E.G.F. (2001) Individual wealth, reservation wages, and transitions into employment. Journal of Labor Economics 19, 400–439.Google Scholar
Boone, J. and Bovenberg, L. (2013) Optimal taxation and welfare benefits with monitoring of job search. International Tax and Public Finance 20 (2), 268–292.Google Scholar
Boone, J., Fredriksson, P., Holmlund, B., and van Ours, J. (2007) Optimal unemployment insurance with monotoring and sanctions. Economic Journal 117 (518), 399–421.Google Scholar
Borowczyk-Martins, D., Jolivet, G., and Postel-Vinay, F. (2013) Accounting for endogeneity in matching function estimation. Review of Economic Dynamics 16 (3), 440–451.CrossRefGoogle Scholar
Campolmi, A. and Faia, E. (2011) Labor market institutions and inflation volatility in the Euro Area. Journal of Economic Dynamics and Control 35 (5), 793–812.Google Scholar
Chetty, R. (2008) Moral hazard vs. liquidity and optimal unemployment insurance. Journal of Political Economy 116 (2), 173–234.Google Scholar
Christensen, B.J., Lentz, R., Mortensen, D.T., Neumann, G.R., and Werwatz, A. (2005) On-the-job search and the wage distribution. Journal of Labor Economics 23 (1), 31–58.Google Scholar
Coles, M. (2008) Optimal Unemployment Insurance with Hidden Search Effort and Endogenous Savings. Unpublished manuscript, IZA Workshop: Frictions in the Labor Market: Causes, Consequences, and Policy Implications.Google Scholar
Coles, M. and Masters, A. (2006) Optimal unemployment insurance in a matching equilibrium. Journal of Labor Economics 24 (1), 109–138.Google Scholar
Costain, J.S. and Reiter, M. (2008) Business cycles, unemployment insurance, and the calibration of matching models. Journal of Economic Dynamics and Control 32 (4), 1120–1155.Google Scholar
Ek, S. and Holmlund, B. (2015) Part-time unemployment and optimal unemployment insurance. International Tax and Public Finance 22 (2), 201–223.Google Scholar
Fredriksson, P. and Holmlund, B. (2001) Optimal unemployment insurance in search equilibrium. Journal of Labor Economics 19 (2), 370–399.Google Scholar
Fredriksson, P. and Holmlund, B. (2006) Optimal unemployment insurance design: Time limits, monitoring, or workfare? International Tax and Public Finance 13 (5), 565–585.CrossRefGoogle Scholar
Gruber, J. (1997) The consumption smoothing benefits of unemployment insurance. American Economic Review 87 (1), 192–205.Google Scholar
Hagedorn, M. and Manovskii, I. (2008) The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review 98 (4), 1692–1706.Google Scholar
Hopenhayn, H. and Nicolini, P. (1997) Optimal unemployment insurance. Journal of Political Economy 105 (2), 412–438.Google Scholar
Hosios, A. (1990) On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279–298.Google Scholar
Kennickell, A. and Lusardi, A. (2004) Disentangling the Importance of the Precautionary Saving Mode. Working paper 10888, National Bureau of Economic Research.Google Scholar
Kocherlakota, N. (2004) Figuring out the impact of hidden savings on optimal unemployment insurance. Review of Economic Dynamics 7 (3), 541–554.Google Scholar
Krusell, P., Mukoyama, T., and Sahin, A. (2010) Labor-Market matching with precautionary savings and aggregate fluctuations. Review of Economic Studies 77 (4), 1477–1507.Google Scholar
Lentz, R. (2009) Optimal unemployment insurance in an estimated job search model with savings. Review of Economic Dynamics 12 (1), 37–57.Google Scholar
Lentz, R. and Tranæ, T.(2005) Job search and savings: Wealth effects and duration dependence. Journal of Labor Economics 23 (3), 467–489.Google Scholar
Lise, J. (2013) On-the-job search and precautionary savings. Review of Economic Studies 80 (3), 1086–1113.Google Scholar
Mukoyama, T. (2013) Understanding the welfare effects of unemployment insurance policy in general equilibrium. Journal of Macroeconomics 38 (Pt. B) 347–368.Google Scholar
Petrongolo, B. and Pissarides, C. (2001) Looking into the black box: A survey of the matching function. Journal of Economic Literature 39 (2), 390–431.Google Scholar
Rendahl, P. (2012) Asset-based unemployment insurance. International Economic Review 53 (3), 743–770.Google Scholar
Rendon, S. (2006) Job search and asset accumulation under borrowing constraints. International Economic Review 47 (1), 233–263.Google Scholar
Shimer, R. (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (1), 25–49.Google Scholar
Shimer, R. and Werning, I. (2008) Liquidity and Insurance for the Unemployed. FRB Minneapolis staff report 366.Google Scholar
Thomas, C. and Zanetti, F. (2009) Labor market reform and price stability: An application to the Euro Area. Journal of Monetary Economics 56 (6), 885–899.Google Scholar
Young, E.R. (2004) Unemployment insurance and capital accumulation. Journal of Monetary Economics 51 (8), 1683–1710.Google Scholar
Zanetti, F. (2011) Labor market institutions and aggregate fluctuations in a search and matching model. European Economic Review 55 (5), 644–658.Google Scholar