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Optimal unemployment insurance design: time limits, monitoring, or workfare?

Author: Peter Fredriksson, And Bertil Holmlund, And

Published in: International Tax and Public Finance, vol. 13, iss. 5, pp. 565-585

Summary of Working paper 2005:13

This paper analyses crucial design features of unemployment insurance
(UI) policies. We examine three different means of improving
the efficiency of UI: the duration of benefit payments, monitoring in
conjunction with sanctions, and workfare. To that end we develop
a quantitative model of equilibrium unemployment. The model features
worker heterogeneity in preferences for leisure. The numerical
analysis suggests that a system with monitoring and sanctions restores
search incentives most effectively, since it brings additional
incentives to search actively so as to avoid the sanction. Therefore,
the UI provider can offer a more generous UI replacement rate in a
system with monitoring and sanctions than in the other two systems.
Workfare appears to be inferior to the other two systems.
Keywords: Unemployment insurance, Search equilibrium, Time
limits, Monitoring and sanctions, Workfare.
JEL-classification: J64, J68

This paper analyses crucial design features of unemployment insurance(UI) policies. We examine three different means of improving the efficiency of UI: the duration of benefit payments, monitoring in conjunction with sanctions, and workfare. To that end we develop a quantitative model of equilibrium unemployment. The model features worker heterogeneity in preferences for leisure. The numerical analysis suggests that a system with monitoring and sanctions restores search incentives most effectively, since it brings additional incentives to search actively so as to avoid the sanction. Therefore, the UI provider can offer a more generous UI replacement rate in a system with monitoring and sanctions than in the other two systems. Workfare appears to be inferior to the other two systems.

Keywords: Unemployment insurance, Search equilibrium, Time limits, Monitoring and sanctions, Workfare.
JEL-classification: J64, J68

Research areas