TY  - JOUR
AU  - Shimer,Robert
AU  - Werning,Ivan
TI  - Liquidity and Insurance for the Unemployed
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11689
PY  - 2005
Y2  - October 2005
UR  - http://www.nber.org/papers/w11689
L1  - http://www.nber.org/papers/w11689.pdf
N1  - Author contact info:
Robert Shimer
Department of Economics
University of Chicago
1126 East 59th Street
Chicago, IL 60637
Tel: 773/702-9015
E-Mail: shimer@uchicago.edu

Ivan Werning
MIT Department of Economics
50 Memorial Drive, E51-251a
Cambridge, MA 02142-1347
Tel: 617/452-3662
Fax: 617/253-1330
E-Mail: iwerning@mit.edu
AB  - We study the optimal design of unemployment insurance for workers sampling job opportunities over time. We focus on the timing of benefits and the desirability of allowing workers to freely access a riskless asset. When workers have constant absolute risk aversion preferences, a very simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to savings using the riskless asset. Away from this benchmark, for constant relative risk aversion preferences, the optimal policy involves nearly constant benefits and the welfare gains from more elaborate policies are minuscule. Our results highlight two distinct roles for policy toward the unemployed: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies that serve as insurance against the uncertain duration of unemployment spells.
ER  -