Working Paper: CEPR ID: DP7334
Authors: Torben M. Andersen; Michael Svarer
Abstract: The consequences of business cycle contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between "good" and "bad" states of nature. We show that not only is there an insurance argument for such contingencies, but also an incentive argument. If benefits are less distortionary in a recession than a boom, it follows that countercyclical benefits reduce average distortions compared to state independent benefits. We show that optimal benefits are state contingent and tend to reduce the structural (average) unemployment rate, although the variability of unemployment may increase.
Keywords: Business cycle; Incentives; Insurance; Unemployment benefits
JEL Codes: H4; J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| business cycle dependent unemployment insurance (J65) | average distortions (C51) |
| business cycle dependent unemployment insurance (J65) | unemployment rates (J64) |
| optimal benefits (H21) | job search behavior (J68) |
| countercyclical benefits (E32) | search efforts (C90) |
| search efforts (C90) | unemployment rates (J64) |
| countercyclical benefits (E32) | job finding rates (J68) |
| job finding rates (J68) | unemployment rates (J64) |