State Dependent Unemployment Benefits

20 Pages Posted: 20 May 2011

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)

Date Written: June 2011

Abstract

Optimal design of unemployment insurance is considered in a search setting where the state of nature (business cycle) affects the unemployment risk and thus the return to search. The incentive effects or distortions of individual job search arising due to the unemployment insurance scheme are crucial for optimal policies, so is the scope for risk diversification that depends critically on whether the balanced budget requirement applies to each state of nature or across states of nature. In the former case a basic budget effect tends to cause optimal benefits to be procyclical. If risk diversification across states of nature is possible, the fact that incentives are more distorted in good than bad states of nature tends to make both benefits and contribution rates countercyclical. It is shown that countercyclical benefits exacerbate employment fluctuations but increase average employment by aligning benefits more with states of nature where the incentive costs are small.

Suggested Citation

Andersen, Torben M. and Svarer, Michael, State Dependent Unemployment Benefits (June 2011). Journal of Risk and Insurance, Vol. 78, Issue 2, pp. 325-344, 2011, Available at SSRN: https://ssrn.com/abstract=1841261 or http://dx.doi.org/10.1111/j.1539-6975.2010.01379.x

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Michael Svarer

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

Universitetsparken
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DK-8000 Aarhus C
Denmark
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+45 8613 6334 (Fax)

Institute for the Study of Labor (IZA)

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Bonn, D-53072
Germany

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