Optimal life cycle unemployment insurance

It seems we should index unemployment benefits to a person’s age.  For the liquidity-constrained, human capital-investing young, we don’t want to rush them into unsuitable jobs.  The older workers — that’s another matter.   Michelacci and Ruffo report:

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.

The AER version is here.  Ungated versions are here.  Elsewhere Ben Casselman considers some ways that unemployment has changed, and what that may mean for benefits.


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