A Macroeconomic Approach to Optimal Unemployment Insurance: Theory

Camille Landais · Pascal Michaillat · Emmanuel Saez

131 citations0/0 files storedAmerican Economic Journal Economic Policy

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Labor market dynamics and wage inequality Gender, Labor, and Family Dynamics Economic theories and models

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)

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References

1991Equilibrium Unemployment Theory 1999Well-Being Over Time in Britain and the USA 2002What Can Economists Learn from Happiness Research?n.d.Looking into the Black Box: A Survey of the Matching Function 2003The Macroeconomics of Happiness 1990On the Efficiency of Matching and Related Models of Search and Unemployment 2005Employment Fluctuations with Equilibrium Wage Stickiness 1982Wage Determination and Efficiency in Search Equilibrium

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