NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Should Unemployment Insurance Vary With the Unemployment Rate? Theory and Evidence

Kory Kroft, Matthew J. Notowidigdo

NBER Working Paper No. 17173
Issued in June 2011
NBER Program(s):   LS   PE

We study how the level of unemployment insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, we find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate.

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A data appendix is available at http://www.nber.org/data-appendix/w17173

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Document Object Identifier (DOI): 10.3386/w17173

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