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Type: Journal Articles Authors: Thomas F Crossley and Hamish Low ISSN: 0927-5940
Published in: International Tax and Public Finance
Volume, issue, pages: Vol. 18, No. 6, pp. 658-687
JEL classification: J65; H53; D91 Keywords: Unemployment insurance; savings; credit constraints; life-cycle; consumption
Previous version: IFS Working Papers [Details]
When it is costly for individuals to save or to borrow, unemployment insurance (UI) provides an alternative source of liquidity that smooths consumption over time and leads individuals to spend longer unemployed searching for a suitable job. We show in a tractable life-cycle model how the optimal unemployment replacement ratio and the fall in consumption on job loss depend on the cost of self-insurance and the cost of borrowing. This implies that the value of UI depends on age at job loss, consumption needs (such as the presence of children), discount rates, the return on saving, access to credit and the presence of other social insurance programmes. Optimal replacement rates vary substantially with plausible variation in these factors (from less than 20 percent to almost 60 percent). Search |
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