OPTIMAL UNEMPLOYMENT INSURANCE,WITH HUMAN CAPITAL DEPRECIATION,AND DURATION DEPENDENCE* |
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| Authors: | Nicola Pavoni |
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| Institution: | 1. University College London and Institute for Fiscal Studies;2. I thank Antonio Cabrales, Per Krusell, Matthias Messner, Kjetil Storesletten, Fabrizio Zilibotti, and two anonymous referees for helpful comments. The article benefits from a profitable discussion with Philippe Aghion and Gianluca Violante, during the preliminary stages of the work. I wish to thank conference and seminar participants at Duke University, the LSE, Northwestern University, the University of Iowa, the IIES in Stockholm, and the CERGE‐EI in Prague. This research was supported by Marie Curie Fellowship MCFI‐2000‐00689. Please address correspondence to: Nicola Pavoni, Department of Economics, UCL, Gower Street, London WC1E 6BT, UK. Phone: +44‐207?67?95846. Fax: +44‐207?67?95846. E‐mail: . |
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| Abstract: | This article introduces the possibility of a deterioration in job opportunities during unemployment into the standard optimal unemployment insurance (UI) design framework and characterizes the efficient UI scheme. The optimal program may display two novel features, which cannot be present in stationary models. First, UI transfers are bounded below by a minimal assistance level that arises endogenously in the efficient contract. Second, the optimal scheme implies a wage subsidy for long‐term unemployed workers. Numerical simulations based on the Spanish and U.S. economies suggest that both assistance transfers and wage subsidies should be part of the UI scheme in these countries. |
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