On the Optimal Timing of Benefits with Heterogeneous Workers and Human Capital Depreciation

Abstract

This paper studies the optimal timing of unemployment insurance subsidies in a McCall search model. Risk-averse workers sequentially sample random job opportunities. Our model distinguishes unemployment subsidies from consumption during unemployment by allowing workers to save and borrow freely. When the insurance agency faces a group of homogeneous workers solving stationary search problems, the optimal subsidies are independent of unemployment duration. In contrast, when workers are heterogeneous or when human capital depreciates during the spell, the optimal subsidy is no longer constant. We explore the main determinants of the shape of the optimal subsidy schedule, isolating forces for subsidies to optimally rise or fall with duration.

Labor Market Effects of Unemployment Insurance Design

“…The optimality of constant benefits also rests on the assumption of homogeneous workers for whom the trade‐off between insurance and incentives does not change over time. In the presence of duration dependence, when the job‐finding probabilities deteriorate over the spell of unemployment, or when there is heterogeneity in the types of unemployed, the trade‐off between insurance and incentives changes during the spell and the optimal benefits should also vary over time (Shimer and Werning, ). The exact profile of optimal benefits depends on the mechanism that drives duration dependence and on the form of heterogeneity.…”

Optimal Unemployment Insurance with Endogenous Negative Duration Dependence

“…I assume a constant per-period unemployment benefit, appealing to (1) consistency with many such simple UI schemes in reality and (2) the theoretical work in Shimer and Werning (2008) and Jung and Kuester (2015) which both show in different settings the optimality or near optimality of constant UI benefits. Shimer and Werning (2006), however, prove that in search models with nonstationary environments, optimal UI benefits may no longer be constant. 6.…”

Rising UI benefits over time

“…6 5 Shimer and Werning (2006) analyze the time-profile of UI benefits with heterogeneous workers. They focus on wage heterogeneity, whereas we choose to focus on differences in search abilities.…”

“…A rare exception isFudenberg et al (1990); see also the related discussion inRogerson (1985). For recent studies that consider the optimal UI system while allowing workers to save and borrow freely, seeShimer and Werning (2006) and(2008). See also our discussion in footnote 4 above.…”