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IFAU - Institute for Evaluation of Labour Market and Education Policy Working Paper Series
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2005:13:
Optimal unemployment insurance design: time limits, monitoring, or workfare?

Peter Fredriksson () and Bertil Holmlund ()

Abstract: This paper analyses crucial design features of unemployment insurance (UI) policies. We examine three different means of improving the efficiency of UI: the duration of benefit payments, monitoring in conjunction with sanctions, and workfare. To that end we develop a quantitative model of equilibrium unemployment. The model features worker heterogeneity in preferences for leisure. The numerical analysis suggests that a system with monitoring and sanctions restores search incentives most effectively, since it brings additional incentives to search actively so as to avoid the sanction. Therefore, the UI provider can offer a more generous UI replacement rate in a system with monitoring and sanctions than in the other two systems. Workfare appears to be inferior to the other two systems.

Keywords: Unemployment insurance; search equilibrium; time limits; monitoring and sanctions; workfare; (follow links to similar papers)

JEL-Codes: J64; J68; (follow links to similar papers)

33 pages, May 12, 2005

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This paper is published as:
Fredriksson, Peter and Bertil Holmlund, (2006), 'Optimal unemployment insurance design: time limits, monitoring, or workfare?', International Tax and Public Finance, pages 565-585



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