IDEAS home Printed from https://ideas.repec.org/p/upj/weupjo/95-35.html
   My bibliography  Save this paper

Optimal Unemployment Insurance

Author

Listed:
  • Carl Davidson

    (Michigan State University)

  • Stephen A. Woodbury

    (W.E. Upjohn Institute for Employment Research)

Abstract

We investigate the design of an optimal Unemployment Insurance program using an equilibrium search and matching model calibrated using data from the reemployment bonus experiments and secondary sources. We examine (a) the optimal potential duration of UI benefits, (b) the optimal UI replacement rate when the potential duration of benefits is optimal, and (c) the optimal UI replacement rate when the potential duration of benefits is sub-optimal. There are three main conclusions. First, insurance considerations suggest that the potential duration of UI benefits would be unlimited under an optimal program. Hence, existing UI programs in the U.S. provide benefits for too short a period of time. Second, if the potential duration to benefits were unlimited, current replacement rates in the U.S., which are in the neighborhood of .5, would probably be about right. Third, with the potential duration of benefits limited to 26 weeks, as in most states during normal times, replacement rates of .5 are too low the optimal replacement rate is 1 if the potential duration of benefits is limited to 32 weeks or less.

Suggested Citation

  • Carl Davidson & Stephen A. Woodbury, 1995. "Optimal Unemployment Insurance," Upjohn Working Papers 95-35, W.E. Upjohn Institute for Employment Research.
    • Handle: RePEc:upj:weupjo:95-35
    as

    Download full text from publisher

    File URL: http://research.upjohn.org/cgi/viewcontent.cgi?article=1052&context=up_workingpapers
    Download Restriction: This material is copyrighted. Permission is required to reproduce any or all parts.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    2. Davidson, Carl & Woodbury, Stephen A, 1993. "The Displacement Effect of Reemployment Bonus Programs," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 575-605, October.
    3. Woodbury, Stephen A & Spiegelman, Robert G, 1987. "Bonuses to Workers and Employers to Reduce Unemployment: Randomized Trials in Illinois," American Economic Review, American Economic Association, vol. 77(4), pages 513-530, September.
    4. Rebecca M. Blank & David E. Card, 1991. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1157-1189.
    5. Stephen A. Woodbury, 2009. "Unemployment," Book chapters authored by Upjohn Institute researchers, in: Kenneth G. Dau-Schmidt & Seth D. Harris & Orley Lobel (ed.),Labor and Employment Law and Economics, volume 2, pages 480-516, W.E. Upjohn Institute for Employment Research.
    6. Phillip B. Levine, 1993. "Spillover Effects between the Insured and Uninsured Unemployed," ILR Review, Cornell University, ILR School, vol. 47(1), pages 73-86, October.
    7. David Card & W. Craig Riddell, 1993. "A Comparative Analysis of Unemployment in Canada and the United States," NBER Chapters, in: Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States, pages 149-190, National Bureau of Economic Research, Inc.
    8. Olivier Jean Blanchard & Peter A. Diamond, 1989. "The Aggregate Matching Function," NBER Working Papers 3175, National Bureau of Economic Research, Inc.
    9. Card, David & Levine, Phillip B., 1994. "Unemployment insurance taxes and the cyclical and seasonal properties of unemployment," Journal of Public Economics, Elsevier, vol. 53(1), pages 1-29, January.
    10. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 541-562.
    11. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    12. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-1362, December.
    13. Card, David & Freeman, Richard B. (ed.), 1993. "Small Differences That Matter," National Bureau of Economic Research Books, University of Chicago Press, number 9780226092836, Febrero.
    14. Kevin M. Murphy & Robert H. Topel, 1987. "The Evolution of Unemployment in the United States: 1968–1985," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 11-68, National Bureau of Economic Research, Inc.
    15. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
    16. Peter Diamond (ed.), 1990. "Growth / Productivity / Unemployment," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262041103, April.
    17. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
    18. Flemming, J. S., 1978. "Aspects of optimal unemployment insurance : Search, leisure, savings and capital market imperfections," Journal of Public Economics, Elsevier, vol. 10(3), pages 403-425, December.
    19. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    20. Carl Davidson & Stephen A. Woodbury, 1996. "Unemployment Insurance and Unemployment Implications of the Reemployment Bonus Experiments," Book chapters authored by Upjohn Institute researchers, in: Advisory Council on Unemployment Compensation: Background Papers, volume 3, pages KK1-KK37, W.E. Upjohn Institute for Employment Research.
    21. Chirinko, Robert S, 1982. "An Empirical Investigation of the Returns to Job Search," American Economic Review, American Economic Association, vol. 72(3), pages 498-501, June.
    22. Abraham, Katharine G, 1983. "Structural-Frictional vs. Deficient Demand Unemployment: Some New Evidence," American Economic Review, American Economic Association, vol. 73(4), pages 708-724, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carl Davidson & Stephen A. Woodbury, 1997. "The Optimal Dole with Risk Aversion, Job Destruction, and Worker Heterogeneity," Upjohn Working Papers 97-47, W.E. Upjohn Institute for Employment Research.
    2. Fredriksson, Peter & Holmlund, Bertil, 2001. "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 370-399, April.
    3. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392, Elsevier.
    4. Bruce D. Meyer, 1992. "Policy Lessons from the U.S. Unemployment Experiments," NBER Working Papers 4197, National Bureau of Economic Research, Inc.
    5. Vijlbrief, J.A., 1992. "Equity and efficiency in unemployment insurance," Serie Research Memoranda 0014, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    6. Carl Davidson & Stephen A. Woodbury, 1996. "Unemployment Insurance and Unemployment Implications of the Reemployment Bonus Experiments," Book chapters authored by Upjohn Institute researchers, in: Advisory Council on Unemployment Compensation: Background Papers, volume 3, pages KK1-KK37, W.E. Upjohn Institute for Employment Research.
    7. Carl Davidson & Stephen A. Woodbury, 2000. "Wage-Rate Subsidies for Dislocated Workers," Book chapters authored by Upjohn Institute researchers, in: Laurie J. Bassi & Stephen A. Woodbury (ed.),Long-term Unemployment and Reemployment Policies, pages 141-184, W.E. Upjohn Institute for Employment Research.
    8. Holmlund, Bertil, 1997. "Unemployment Insurance in Theory and Practice," Working Paper Series 1997:25, Uppsala University, Department of Economics.
    9. Taslimi, Mohammad, 2003. "Optimal Earnings-Related Unemployment Benefits," Working Paper Series 2003:16, Uppsala University, Department of Economics.
    10. Brown, Alessio J.G. & Merkl, Christian & Snower, Dennis J., 2011. "Comparing the effectiveness of employment subsidies," Labour Economics, Elsevier, vol. 18(2), pages 168-179, April.
    11. Jan Boone & Peter Fredriksson & Bertil Holmlund & Jan C. van Ours, 2007. "Optimal Unemployment Insurance with Monitoring and Sanctions," Economic Journal, Royal Economic Society, vol. 117(518), pages 399-421, March.
    12. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
    13. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
    14. Saez, Emmanuel & Landais, Camille & Michaillat, Pascal, 2010. "Optimal Unemployment Insurance over the Business Cycle," CEPR Discussion Papers 8132, C.E.P.R. Discussion Papers.
    15. Puhani, Patrick A, 1999. "Public Training and Outflows from Unemployment: An Augmented Matching Function Approach on Polish Regional Data," CEPR Discussion Papers 2244, C.E.P.R. Discussion Papers.
    16. Reichling, Felix, 2006. "Optimal Unemployment Insurance in Labor Market Equilibrium when Workers can Self-Insure," MPRA Paper 5362, University Library of Munich, Germany, revised 16 Oct 2007.
    17. Peter Fredriksson & Bertil Holmlund, 2006. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 357-386, July.
    18. Walter Nicholson & Karen Needels, 2006. "Unemployment Insurance: Strengthening the Relationship between Theory and Policy," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 47-70, Summer.
    19. Carl Davidson & Stephen A. Woodbury, 2001. "From Social Experiment to Program," Book chapters authored by Upjohn Institute researchers, in: Philip K. Robins & Robert G. Spiegelman (ed.), Reemployment Bonuses in the Unemployment Insurance System: Evidence from Three Field Experiments, chapter 6, pages 175-222, W.E. Upjohn Institute for Employment Research.
    20. Stephen A. Woodbury & Murray Rubin, 1997. "The Duration of Benefits," Book chapters authored by Upjohn Institute researchers, in: Christopher J. O'Leary & Stephen A. Wandner (ed.), Unemployment Insurance in the United States: Analysis of Policy Issues, chapter 6, pages 211-283, W.E. Upjohn Institute for Employment Research.

    More about this item

    Keywords

    unemployment; insurance; Davidson; Woodbury;
    All these keywords.

    JEL classification:

    • J0 - Labor and Demographic Economics - - General
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:upj:weupjo:95-35. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/upjohus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.