Working Paper: NBER ID: w17173
Authors: Kory Kroft; Matthew J. Notowidigdo
Abstract: We study how the level of unemployment insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, we find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate.
Keywords: Unemployment Insurance; Moral Hazard; Consumption Smoothing; Business Cycle
JEL Codes: H5; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment rate (J64) | welfare-maximizing wage replacement rate (H55) |
| UI benefits (J65) | unemployment duration (J64) |
| unemployment rate (J64) | elasticity of unemployment durations (J64) |
| unemployment rate (J64) | moral hazard cost of UI benefits (J65) |
| unemployment rate (J64) | consumption smoothing benefit of UI (J65) |