Liquidity and Insurance for the Unemployed (screen version)
(print version)
Robert Shimer (Chicago) and Ivan Werning
(MIT)
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.