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Ebook Understanding the Welfare Effects of Unemployment Insurance Policy in General Equilibrium

Unemployment insurance (UI) allows consumers to cope with the risk of large fluctuations in income due to job losses. It also provides a method of smoothing consumption while unemployed, particularly for consumers who are constrained in borrowing. Because this type of insurance is difficult to provide through the private market, UI has long been viewed as an important government policy. There has been a large amount of research devoted to understanding the effect of government-provided UI, on both theoretical and empirical fronts.

In the past 30 years, many papers have been written on"optimal UI policy. "These papers typically consider a set of available UI policy options, and selects the "optimal" policy based on certain welfare criteria. Existing papers vary widely in terms of the environments they consider and the restrictions that they puton the available policy instruments.

Some papers analyze environments with only one consumer, some consider environments with many heterogeneous consumers, and others construct a fully general equilibrium environment with production. Some papers consider a fully duration dependent UI benefit, some only consider a constant benefit with various levels, and others analyze a benefit that is non-constant but has restricted flexibility.

The quantitative literature differs substantially on their recommendation of the "optimal UI benefit." It turns out that the results depend on the details of the model, and the models typically involve many elements that are affected by the change in the UI benefit, so that it is difficult to identify which details are driving the differences in the results. To learn from the models and draw lessons for the actual policy making, it does not seem productive to simply list various numbers that are obtained from different settings. Rather, it is necessary to understand how these quantitative conclusions are drawn.

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