Financial/Actuarial Mathematics Seminar

We analyze the benefit of varying the amount of unemployment insurance (UI) over the business cycle in a model featuring optimal job-search effort by unemployed workers. In our model, increasing UI benefits reduces the incentive to search for a job, but has the benefit of smoothing consumption of unemployed workers. Our calibrated model predicts that a policy which commits to increasing UI benefits when the unemployment rate increases reduces the welfare of almost all individuals. Our result overturns the partial equilibrium result in the existing literature because in the general equilibrium, a countercyclical UI benefit policy leads to lower labor supply, output, and consumption.

Joint work with Erhan Bayraktar and Jingjie Zhang. Speaker(s): Indrajit Mitra (Federal Reserve Bank of Atlanta)