Business Cycle Dependent Unemployment Insurance

39 Pages Posted: 4 Oct 2010

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Michael Svarer

Aarhus University - Department of Economics and Business Economics; Institute for the Study of Labor (IZA)

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 there may also be an incentive argument. Since benefits may be less distortionary in a recession than a boom, it follows that counter-cyclical benefits reduce average distortions compared to state independent benefits. We show that optimal (utilitarian) benefits are counter-cyclical and may reduce the structural (average) unemployment rate, although the variability of unemployment may increase.

Keywords: unemployment benefits, business cycle, insurance, incentives

JEL Classification: J6, H3

Suggested Citation

Andersen, Torben M. and Svarer, Michael, Business Cycle Dependent Unemployment Insurance. IZA Discussion Paper No. 5196, Available at SSRN: https://ssrn.com/abstract=1686487

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Michael Svarer

Aarhus University - Department of Economics and Business Economics ( email )

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