How Should Unemployment Insurance Vary over the Business Cycle?

RePEc Short ID: pbi318
ORCID iD: 0000-0001-7323-1932

Birinci, Serdar; See, Kurt

doi:10.20955/wp.2019.022

Working Paper

How Should Unemployment Insurance Vary over the Business Cycle?

Abstract: We study optimal unemployment insurance (UI) over the business cycle using a tractable heterogeneous agent job that features labor productivity driven business cycles and incomplete asset markets, and find that UI policy should be countercyclical. In this framework, besides providing consumption insurance upon job loss, generous UI payments allow individuals to maintain similar consumption levels even during recessions, when they would otherwise have had to accumulate savings by reducing consumption.Moreover, the presence of borrowing constrains disciplines the unemployed's job search behavior, thus offsetting some of the moral hazard costs introduced by the generous UI payments in downturns. Even when the opportunity cost of employment is set to be high, these channels remain active to preserve the countercyclicality of the optimal UI policy.

Keywords: Unemployment Insurance; Business Cycles; Job Search;

JEL Classification: E24; E32; J64; J65;

https://doi.org/10.20955/wp.2019.022

Status: Published in American Economic Journal: Macroeconomics