American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Fiscal Externalities and Optimal Unemployment Insurance
American Economic Journal: Economic Policy
(pp. 281–312)
Abstract
A common finding of the optimal unemployment insurance (UI) literature is that the optimal replacement rate is around 50 percent; however, a key assumption is that UI is the only government spending activity. I show that optimal UI levels may be dramatically reduced when 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 standard calibrated structural job search model and a "sufficient statistics" method, I find that the optimal replacement rate is zero when fiscal externalities are incorporated.Citation
Lawson, Nicholas. 2017. "Fiscal Externalities and Optimal Unemployment Insurance." American Economic Journal: Economic Policy 9 (4): 281–312. DOI: 10.1257/pol.20140396Additional Materials
JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- J64 Unemployment: Models, Duration, Incidence, and Job Search
- J65 Unemployment Insurance; Severance Pay; Plant Closings