Optimal Unemployment Insurance

Authors

Carl Davidson, Michigan State University
Stephen A. Woodbury, Michigan State University and W.E. Upjohn Institute for Employment ResearchFollow

Upjohn Author ORCID Identifier

https://orcid.org/0000-0002-4474-2415

Publication Date

4-1-1995

Series

Upjohn Institute Working Paper No. 95-35

**Published Version**

In Journal of Public Economics 64(3): 359-387 (1997).
Advisory Council on Unemployment Compensation: Background Papers. Washington, D.C.: The Council, 1995-1996, v.3, pp. [BB1]-BB50

DOI

10.17848/wp95-35

Abstract

We investigate the design of an optimal Unemployment Insurance program using an equilibrium search and matching model calibrated using data from the reemployment bonus experiments and secondary sources. We examine (a) the optimal potential duration of UI benefits, (b) the optimal UI replacement rate when the potential duration of benefits is optimal, and (c) the optimal UI replacement rate when the potential duration of benefits is sub-optimal. There are three main conclusions. First, insurance considerations suggest that the potential duration of UI benefits would be unlimited under an optimal program. Hence, existing UI programs in the U.S. provide benefits for too short a period of time. Second, if the potential duration to benefits were unlimited, current replacement rates in the U.S., which are in the neighborhood of .5, would probably be about right. Third, with the potential duration of benefits limited to 26 weeks, as in most states during normal times, replacement rates of .5 are too low -- the optimal replacement rate is 1 if the potential duration of benefits is limited to 32 weeks or less.

Issue Date

April 1995

Note

Presented at Eastern Economic Association Annual Convention, New York, March 17-19, 1995; National Bureau of Economic Research Summer Institute (Public Economics and Social Insurance Sessions), Cambridge, Massachusetts, July 31-August 1, 1995; Advisory Council on Unemployment Compensation Second Research Conference, Burlington, Vermont, August 17-18, 1995

Sponsorship

Financial support provided by the Advisory Council on Unemployment Compensation.

Subject Areas

UNEMPLOYMENT, DISABILITY, and INCOME SUPPORT PROGRAMS; Unemployment insurance; Benefits and duration