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Optimal unemployment accounts based on observable parameters

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  • Rubén Castro

    (Universidad Técnica Federico Santa María)

Abstract

Baily (1978)’s model provides an observable condition of optimality for unemployment benefits (“b”). We add unemployment accounts (UAs) into the model, where employed individuals deposit a “s” saving rate and UAs finance unemployment benefits until their funds are exhausted and tax-financed benefits begin. The idea is that UAs reduce the distortion caused by pooling financed benefits, but in doing so they lower consumption smoothing across states of nature. We found that Baily (1978)’s rule for optimal benefits remains unchanged if UAs are added into his model, and we found a simple and easily observable rule for the optimal saving rate into UAs: the proportion of unemployment to be self-financed should equal the ratio of unemployment duration elasticity with respect to s and b.

Suggested Citation

  • Rubén Castro, 2023. "Optimal unemployment accounts based on observable parameters," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 48(2), pages 260-270, September.
  • Handle: RePEc:pal:genrir:v:48:y:2023:i:2:d:10.1057_s10713-023-00083-4
    DOI: 10.1057/s10713-023-00083-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Unemployment insurance; Individual accounts; Social security;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H - Public Economics
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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