Unemployment insurance and redistributive taxation

This paper studies the simultaneous determination of the socially optimal levels of unemployment insurance, income taxation and experience rating. It argues that there is a normative justification for state unemployment insurance. When the government wishes to use redistributive taxes, but cannot enforce lump-sum transfers, it is not socially optimal for there to be full experience rating of unemployment insurance schemes: one distortion should be used to off-set another. The state must then intervene in the provision of insurance for those without jobs.