A Macroeconomic Theory of Optimal Unemployment Insurance

Camille Landais, Pascal Michaillat and Emmanuel Saez

No 16526, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theory of optimal unemployment insurance (UI) that accounts for workers’ job-search behavior and firms’ hiring behavior. The optimal replacement rate of UI is the conventional Baily [1978]-Chetty [2006a] rate, which solves the trade-off between insurance and job-search incentives, plus a correction term, which is positive when UI brings the labor market tightness closer to efficiency. For instance, when tightness is inefficiently low, optimal UI is more generous than the Baily-Chetty rate if UI raises tightness and less generous if UI lowers tightness. We propose empirical criteria to determine whether tightness is inefficiently high or low and whether UI raises or lowers tightness. The theory has implications for the cyclicality of optimal UI.

JEL-codes: E24 E32 H21 H23 (search for similar items in EconPapers)
Date: 2010-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ias, nep-lab and nep-mac
Note: EFG PE
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Citations: View citations in EconPapers (57)

Published as Camille Landais & Pascal Michaillat & Emmanuel Saez, 2018. "A Macroeconomic Approach to Optimal Unemployment Insurance: Theory," American Economic Journal: Economic Policy, vol 10(2), pages 152-181.

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