Optimal unemployment insurance when income effects are large
By: Raj Chetty.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10500; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10500.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Insurance, Unemployment -- Mathematical models; Income -- Mathematical models
Description: "Studies of the consumption-smoothing benefits of unemployment insurance (UI) have found that the optimal benefit level is very small, perhaps even 0, for conventional levels of risk aversion.  In this paper, I derive a formula for the optimal benefit rate in terms of income and price elasticities of unemployment durations, directly inferring risk aversion for the unemployed from their behavioral responses to UI benefits.  The optimal rate of social insurance is shown to depend positively on the size of the income elasticity and negatively on the size of the substitution elasticity.  I estimate these elasticities using semi-parametric hazard models and variation in UI laws across states and over time.  The estimates indicate that income effects account for 70% of the effect of UI on unemployment durations, and yield an optimal replacement rate around 50% of pre-unemployment wages.  These results challenge the prevailing view that social safety nets provide minimal welfare gains at a large efficiency cost"--National Bureau of Economic Research web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 1/11/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.