Employment Insurance and the Business Cycle

Pollak, Andreas (2013): Employment Insurance and the Business Cycle.

Abstract

This paper quantitatively investigates the scope for improving welfare by making aspects of the unemployment insurance (UI) system depend on the state of the business cycle. A particular focus is the Canadian system of "Employment Insurance" (EI), which is designed in such a way that the generosity of benefits depends on the state of the macroeconomy.

Simulations of a life-cycle model with heterogeneous agents and search frictions confirm the expectation that optimal UI systems may be characterized by a substantial increase in generosity during recessions, when adverse labour market conditions reduce the importance of moral hazard while increasing the need for consumption insurance.

It turns out, however, that the welfare improvements resulting from this sort of temporal differentiation of benefits are extremely small. Quantitatively, the effects of insurance against business cycle effects provided by the Canadian EI system is dominated by the welfare implications of the inter-regional redistribution inherent in the system.

• Item Type: MPRA Paper
• Language: English
• Keywords: unemployment insurance; job search; business cycle
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers

References

Andersen, T.M. and M. Svarer (2010): "Business Cycle Dependent Unemployment Insurance," IZA Discussion Paper 5196, September 2010.

Andersen, T.M. and M. Svarer (2011): "State Dependent Unemployment Benefits," Journal of Risk and Insurance, Vol. 78(2), 325-344.

Baily, M.N. (1978)" "Some Aspects of Optimal Unemployment Insurance," Journal of Public Economics, Vol. 10(3), 379-420.

Barron, J.M., M.C. Berger, and D.A. Black (1997): "Employer Search, Training, and Vacancy Duration," Economic Inquiry, Vol. 35(1), 167-92.

Chetty, R. (2006): "A General Formula for the Optimal Level of Social Insurance," Journal of Public Economics, Vol. 90(10-11), 1879-1901.

Ek, S. (2012): "Unemployment Benefits and Taxes: How Should Policy Makers Redistribute Income over the Business Cycle?" IZA Discussion Paper 6308, January 2012.

Farber, H.S. and R.G. Valletta (2013): "Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market," Federal Reserve Bank of San Francisco working paper 2013-09.

Gruber, J. (1997): "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, Vol. 97(1), 192-295.

Hagedorn, M. and I. Manovskii (2008): "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, vol. 98(4), 1692-1706.

Hopenhayn, H.A. and J.P. Nicolini (1997): "Optimal Unemployment Insurance," Journal of Political Economy 105(2), 412-438.

Jung, P. and K. Kuester (2011): "Optimal Labor-Market Policy in Recessions," Federal Reserve Bank of Philadelphia working paper 11-48.

Kiley, M.T. (2003): "How Should Unemployment Benefits Respond to the Business Cycle?" The B.E. Journal of Economic Analysis & Policy, 3(1), 1-20.

Kristoffersen, M.S. (2012): "Business Cycle Dependent Unemployment Benefits with Wealth Heterogeneity and Precautionary Savings," Economics Working Papers 2012-19.

Kroft, K and M.J. Notowidigdo (2011): "Should Unemployment Insurance Vary With The Local Unemployment Rate? Theory And Evidence," working paper, November 2010.

Krusell, P., T. Mukoyama and A. Sahin (2010) "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Vol. 77(4), 1477-1507.

Krusell, P. and A.A. Smith (1998): "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, Vol. 106(5), 867-896.

Lalive, R., C. Landais and J. Zweimueller (2013): "Market Externalities of Large Unemployment Insurance Extension Programs," CESifo Working Paper Series 4414.

Landais, C., P. Michaillat and E. Saez (2010): "Optimal Unemployment Insurance over the Business Cycle," NBER Working Paper 16525, November 2010.

Mitman, K. and S. Rabinovich (2011): "Pro-cyclical unemployment benefits? Optimal policy in an equilibrium business cycle model," PIER Working Paper 11-010.

Moyen, S. and N. Staehler (2009): "Unemployment Insurance and the Business Cycle: Prolong Benefit Entitlements in Bad Times?" Deutsche Bundesbank Discussion Paper Series 1: Economic Studies No 2009,30.

Mukoyama, T. (2012): "Understanding the Welfare Effects of Unemployment Insurance Policy in General Equilibrium," mimeo.

Nakajima, M. (2012): "A Quantitative Analysis of Unemployment Benefit Extensions," Journal of Monetary Economics, Vol. 59, 686-702.

Pallage, S., L. Scruggs and C. Zimmermann (2013): "Measuring Unemployment Insurance Generosity," Political Analysis, forthcoming.

Pallage, S. and C. Zimmermann (2005): "Heterogeneous labor markets and generosity towards the unemployed: an international perspective," Journal of Comparative Economics 33(1), 88-106.

Pallage, S. and C. Zimmermann (2005b): "On Voters' Attitudes towards Unemployment Insurance Subsidies across Regions: A Canadian Simulation," Journal of Population Economics, Vol. 19, 391-410.

Pissarides, C.A. (2000): Equilibrium Unemployment Theory, MIT Press, Cambridge (MA) and London.

Pollak, A. (2007): "Optimal unemployment insurance with heterogeneous agents," European Economic Review, vol. 51(8), 2029-2053.

Pollak, A. (2013): "Unemployment, Human Capital Depreciation, and Unemployment Insurance Policy," Journal of Applied Econometrics, forthcoming.

Rothstein, J. (2011): "Unemployment Insurance and Job Search in the Great Recession," Institute for Research on Labor and Employment, UC Berkeley, working paper.

Rupert, P. and G. Zanella (2010): "Revisiting Wage, Earnings, and Hours Profiles," mimeo.

Schmieder, J.F., T.M von Wachter and S. Bender (2012): "The Effects of Extended Unemployment Insurance over the Business Cycle: Evidence from Regression Discontinuity Estimates over Twenty Years," NBER working paper 17813.

Schuster, P. (2012): "Cyclical unemployment benefits and non-constant returns to matching," mimeo.

Sanchez, J.M. (2008): "Optimal state-contingent unemployment insurance," Economics Letters, 98(3), 348-357.

Shimer, R. and I. Werning (2007): "Reservation Wages and Unemployment Insurance," The Quarterly Journal of Economics, Vol. 122(3), 1145-1185.

Sienkiewicz, L. (2011): "EEO Review: Adapting unemployment benefit systems to the economic cycle, 2011 - Poland," European Employment Observatory.

Silva, J.I. and M. Toledo (2005): "Labor Turnover Costs and the Behavior of Vacancies and Unemployment," Society for Economic Dynamics 2005 Meeting Papers 775.

Tatsiramos, K. and J.C. van Ours (2012): "Labor Market Effects of Unemployment Insurance Design," CentER discussion paper 2012-082.

Werning, I. (2002) "Optimal Unemployment Insurance with Unobservable Savings," mimeo.