Fiscal Externalities and Optimal Unemployment Insurance

98 Pages Posted: 27 Mar 2015

See all articles by Nicholas Lawson

Nicholas Lawson

Aix-Marseille University - Aix-Marseille School of Economics; CNRS; Ecole des Hautes Etudes en Sciences Sociales (EHESS)

Date Written: October 28, 2014

Abstract

A common finding of the optimal unemployment insurance literature is that the optimal replacement rate is around 50%; however, a key assumption is that UI is the only government spending activity. I show that optimal UI levels are dramatically reduced by the fact that UI is a small part of overall spending: the negative impact of UI on income tax revenues implies added welfare costs, a mechanism that I call a fiscal externality. Using both a calibrated structural job search model and a “sufficient statistics” method, I find that the optimal replacement rate is zero when fiscal externalities are incorporated.

Keywords: unemployment insurance, fiscal externality, job search, sufficient statistics, government spending

JEL Classification: I38, J65, J68

Suggested Citation

Lawson, Nicholas, Fiscal Externalities and Optimal Unemployment Insurance (October 28, 2014). Available at SSRN: https://ssrn.com/abstract=2585059 or http://dx.doi.org/10.2139/ssrn.2585059

Nicholas Lawson (Contact Author)

Aix-Marseille University - Aix-Marseille School of Economics ( email )

2 rue de la Charité
Marseille, 13236
France

CNRS ( email )

3, rue Michel-Ange
Paris, 75794
France

Ecole des Hautes Etudes en Sciences Sociales (EHESS) ( email )

54, boulevard Raspail
Paris, 75006
France

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
74
Abstract Views
732
Rank
576,227
PlumX Metrics