Working Paper: NBER ID: w16526
Authors: Camille Landais; Pascal Michaillat; Emmanuel Saez
Abstract: We develop a theory of optimal unemployment insurance (UI) that accounts for workers’ job-search behavior and firms’ hiring behavior. The optimal replacement rate of UI is the conventional Baily [1978]-Chetty [2006a] rate, which solves the trade-off between insurance and job-search incentives, plus a correction term, which is positive when UI brings the labor market tightness closer to efficiency. For instance, when tightness is inefficiently low, optimal UI is more generous than the Baily-Chetty rate if UI raises tightness and less generous if UI lowers tightness. We propose empirical criteria to determine whether tightness is inefficiently high or low and whether UI raises or lowers tightness. The theory has implications for the cyclicality of optimal UI.
Keywords: Optimal Unemployment Insurance; Labor Market Tightness; Job Search Behavior; Hiring Behavior
JEL Codes: E24; E32; H21; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unemployment Insurance (UI) (J65) | Labor Market Tightness (J20) |
| Labor Market Tightness (J20) | Welfare (I38) |
| Optimal Replacement Rate of UI (J65) | Labor Market Tightness (J20) |
| Labor Market Tightness (inefficiently low) (J69) | Optimal Replacement Rate of UI (more generous) (J65) |
| Labor Market Tightness (inefficiently high) (J49) | Optimal Replacement Rate of UI (less generous) (J65) |
| Economic Slumps (E32) | Optimal Replacement Rate of UI (above Baily-Chetty rate) (J68) |
| Economic Booms (E32) | Optimal Replacement Rate of UI (below Baily-Chetty rate) (J68) |