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Abstract

In the United States, unemployment insurance (UI) is more generous when unemployment is high. This paper examines whether this policy is desirable. The optimal UI replacement rate is the Baily-Chetty replacement rate plus a correction term measuring the effect of UI on welfare through labor market tightness. Empirical evidence suggests that tightness is inefficiently low in slumps and inefficiently high in booms, and that an increase in UI raises tightness. Hence, the correction term is positive in slumps but negative in booms, and optimal UI is indeed countercyclical. Since there remains some uncertainty about the empirical evidence, the paper provides a thorough sensitivity analysis.

Figure 7: Optimal UI replacement rate in the United States, 1990–2014

Citation

Landais, Camille, Pascal Michaillat, and Emmanuel Saez. 2018. “A Macroeconomic Approach to Optimal Unemployment Insurance: Applications.” American Economic Journal: Economic Policy 10 (2): 182–216. https://doi.org/10.1257/pol.20160462 .

@article{LMS18,
author = {Camille Landais and Pascal Michaillat and Emmanuel Saez},
doi = {10.1257/pol.20160462},
journal = {American Economic Journal: Economic Policy},
number = {2},
pages = {182--216},
title = {A Macroeconomic Approach to Optimal Unemployment Insurance: Applications},
volume = {10},
year = {2018}}
  • Companion paper – The companion paper develops the macroeconomic theory of optimal unemployment insurance on which this paper is based.
  • Presentation slides
  • Jobs in a Recession – This CentrePiece column explains why, when jobs are rationed, unemployment insurance should be more generous in bad times than in good times.