Working Paper: NBER ID: w12230
Authors: Robert Shimer; Iván Werning
Abstract: This paper studies the optimal timing of unemployment insurance subsidies in a McCall search model. Risk-averse workers sequentially sample random job opportunities. Our model distinguishes unemployment subsidies from consumption during unemployment by allowing workers to save and borrow freely. When the insurance agency faces a group of homogeneous workers solving stationary search problems, the optimal subsidies are independent of unemployment duration. In contrast, when workers are heterogeneous or when human capital depreciates during the spell, the optimal subsidy is no longer constant. We explore the main determinants of the shape of the optimal subsidy schedule, isolating forces for subsidies to optimally rise or fall with duration.
Keywords: unemployment insurance; reservation wage; human capital; job search; optimal policy
JEL Codes: J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing unemployment benefits (J65) | Raises the after-tax reservation wage (J39) |
| Raises the after-tax reservation wage (J39) | Improves the welfare of unemployed workers (J68) |
| Increasing unemployment benefits (J65) | Improves the welfare of unemployed workers (J68) |
| Pretax reservation wage increases (J39) | Enhances workers' welfare (J38) |
| Optimal level of benefits varies with duration of unemployment (J65) | Affects worker welfare (J28) |
| Different financial environments affect the relationship between benefits and reservation wages (J31) | Influences worker welfare (J38) |
| Reservation wage is a sufficient statistic for welfare (D69) | Indicates optimal policy (C61) |