Should Unemployment Insurance Vary With the Unemployment Rate? Theory and Evidence
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.
We thank Joe Altonji, Judy Chevalier, Jonathan Guryan, Erzo Luttmer, Andrew Metrick, Giuseppe Moscarini, Fiona Scott Morton, and seminar participants at Chicago Booth, Federal Reserve Bank of Philadelphia, Harvard, LSE, MIT, NBER, University of Texas at Austin, University of Toronto, Wisconsin, and Yale for providing excellent comments. We thank Jesse Burkhardt and Christian Goldammer for providing outstanding research assistance. Notowidigdo gratefully acknowledges the National Institute of Aging (NIA grant number T32-AG000186) for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Kory Kroft & Matthew J. Notowidigdo, 2016. "Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence," The Review of Economic Studies, vol 83(3), pages 1092-1124. citation courtesy of