Liquidity and insurance for the unemployed

Robert Shimer and Iván Werning

No 366, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We study the optimal design of unemployment insurance for workers sampling job opportunities over time. We focus on the optimal timing of benefits and the desirability of allowing workers to freely access a riskless asset. When workers have constant absolute risk aversion preferences, it is optimal to use a very simple policy: a constant benefit during unemployment, a constant tax during employment that does not depend on the duration of the spell, and free access to savings using a riskless asset. Away from this benchmark, for constant relative risk aversion preferences, the welfare gains of more elaborate policies are minuscule. Our results highlight two largely distinct roles for policy toward the unemployed: (a) ensuring workers have sufficient liquidity to smooth their consumption; and (b) providing unemployment benefits that serve as insurance against the uncertain duration of unemployment spells.

Keywords: Insurance (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dge, nep-ias and nep-lab
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Citations: View citations in EconPapers (39)

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Related works:
Journal Article: Liquidity and Insurance for the Unemployed (2008)
Working Paper: Liquidity and Insurance for the Unemployed (2005)
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