American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Liquidity and Insurance for the Unemployed
American Economic Review
vol. 98,
no. 5, December 2008
(pp. 1922–42)
Abstract
We study unemployment insurance for workers who sequentially sample job opportunities. We focus on the optimal timing of benefits and the desirability of allowing borrowing and saving. When workers have constant absolute risk aversion, a simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to a riskless asset. With constant relative risk aversion, optimal policy involves nearly constant benefits; more elaborate policies offer minuscule welfare gains. We highlight two distinct policy roles: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies to insure against uncertain spell duration. (JEL J65)Citation
Shimer, Robert, and Ivan Werning. 2008. "Liquidity and Insurance for the Unemployed." American Economic Review, 98 (5): 1922–42. DOI: 10.1257/aer.98.5.1922JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- J64 Unemployment: Models, Duration, Incidence, and Job Search
- J65 Unemployment Insurance; Severance Pay; Plant Closings