Working Paper: NBER ID: w11689
Authors: Robert Shimer; Ivan Werning
Abstract: We study the optimal design of unemployment insurance for workers sampling job opportunities over time. We focus on the timing of benefits and the desirability of allowing workers to freely access a riskless asset. When workers have constant absolute risk aversion preferences, a very simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to savings using the riskless asset. Away from this benchmark, for constant relative risk aversion preferences, the optimal policy involves nearly constant benefits and the welfare gains from more elaborate policies are minuscule. Our results highlight two distinct roles for policy toward the unemployed: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies that serve as insurance against the uncertain duration of unemployment spells.
Keywords: No keywords provided
JEL Codes: D82; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| constant benefit policy (G52) | optimal unemployment insurance when workers have CARA (J65) |
| constant benefit policy (G52) | insures workers against unemployment risk (J65) |
| constant benefit policy (G52) | allows workers to smooth consumption through savings (D15) |
| level of benefits and taxes (H55) | reservation wages (R21) |
| optimal unemployment subsidy (J65) | rises slowly over time under CRRA (D15) |
| increased risk aversion (D81) | optimal unemployment subsidy rises slowly (J68) |
| adequate liquidity (E41) | constant benefit structure without significant costs (D41) |
| optimal unemployment insurance system (J65) | minimizes costs while ensuring desired level of utility (D11) |