Scandinavian Working Papers in Economics

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 ()
Additional contact information
Peter Fredriksson: Nationalekonomiska institutionen, Postal: Stockholms universitet, Nationalekonomiska institutionen, 106 91 Stockholm
Bertil Holmlund: Uppsala University, Postal: Department of Economics, Uppsala University, Box 513, SE-751 20 UPPSALA, SWEDEN

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

JEL-codes: J64; J68

33 pages, May 12, 2005

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