Optimal Life Cycle Unemployment Insurance

By Claudio Michelacci and Hernan Ruffo

http://d.repec.org/n?u=RePEc:eie:wpaper:1411&r=dge

We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers.

This paper may seem obvious, but 1) it quantifies that this is economically significant, and 2) did you think about this? Targeting transfers to the population that needs them most is always going to improve things. This paper highlights one such target.