Whether, when and how to extend unemployment benefits: Theory and application to COVID-19.

Mitman K, Rabinovich S

J Public Econ 200 (-) 104447 [2021-08-00; online 2021-05-24]

We investigate the optimal response of unemployment insurance to economic shocks, both with and without commitment. The optimal policy with commitment follows a modified Baily-Chetty formula that accounts for job search responses to future UI benefit changes. As a result, the optimal policy with commitment tends to front-load UI, unlike the optimal discretionary policy. In response to shocks intended to mimic those that induced the COVID-19 recession, we find that a large and transitory increase in UI is optimal; and that a policy rule contingent on the change in unemployment, rather than its level, is a good approximation to the optimal policy.

Category: Social Science & Humanities

Type: Journal article

PubMed 34934254

DOI 10.1016/j.jpubeco.2021.104447

Crossref 10.1016/j.jpubeco.2021.104447

pii: S0047-2727(21)00083-9
pmc: PMC8677353

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