DP10167 Optimal Life Cycle Unemployment Insurance

Author(s): Claudio Michelacci, Hernán Ruffo
Publication Date: September 2014
Keyword(s): insurance, search, unemployment
JEL(s): E24, H21, J64, J65
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10167

We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers.