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Optimal unemployment insurance in a directed search model
Author(s) -
Gervais Martin,
Warren Lawrence,
Boostani Reza
Publication year - 2022
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.13100
Subject(s) - economics , unemployment , generosity , welfare , earnings , systematic risk , volatility (finance) , incomplete markets , aggregate (composite) , labour economics , microeconomics , econometrics , macroeconomics , market economy , philosophy , materials science , theology , accounting , composite material
Over recent decades, several economies have experienced changes in the level of aggregate and idiosyncratic volatility. This paper investigates the appropriate labor market policy response to such changes. We introduce unemployment benefits financed by a proportional earnings tax within a model of directed search on the job. The optimal benefit level is hump‐shaped as a function of the level of idiosyncratic risk, and the welfare costs of deviating from the optimum are substantial. In contrast, while the optimal generosity of unemployment insurance—which is pro‐cyclical—declines with the amount of aggregate risk, the welfare costs of deviating are small.