Robert Shimer (Chicago)
and Ivan Werning (MIT)
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.