A Macroeconomic Approach to Optimal Unemployment Insurance: Applications
Camille Landais, Pascal Michaillat, Emmanuel Saez
In the United States, unemployment insurance (UI) is more generous when unemployment is high. This paper examines whether this policy is desirable. In matching models, the optimal UI replacement rate is the Baily-Chetty replacement rate plus a correction measuring the effect of UI on welfare through labor market tightness. Empirical evidence suggests that tightness is inefficiently low in slumps but inefficiently high in booms, and that an increase in UI raises tightness. Hence, the correction is positive in slumps but negative in booms, and the optimal replacement rate is indeed countercyclical: it varies between 33% in booms and 50% in slumps. Since there remains uncertainty about the estimates of the statistics in the optimal UI formula, the paper provides a complete sensitivity analysis.