DP7334 Business Cycle Dependent Unemployment Insurance

Author(s): Torben M Andersen, Michael Svarer
Publication Date: June 2009
Keyword(s): business cycle, incentives, insurance, unemployment benefits,
JEL(s): H4, J6
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7334

The consequences of business cycle contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between "good" and "bad" states of nature. We show that not only is there an insurance argument for such contingencies, but also an incentive argument. If benefits are less distortionary in a recession than a boom, it follows that countercyclical benefits reduce average distortions compared to state independent benefits. We show that optimal benefits are state contingent and tend to reduce the structural (average) unemployment rate, although the variability of unemployment may increase.