Working Paper Series,
Uppsala University, Department of Economics

Abstract: This paper explores the rationale for unemployment benefits as a complement to optimal non-linear income taxation. High-skilled workers and low-skilled workers face different exogenous risks of being unemployed. As long as the low-skilled workers face a higher unemployment risk, we find that there is a case for over-insuring the low-skilled, hence the unemployment benefits of the low-skilled should be higher than the pure insurance purpose would prescribe. This effect is likely to prevail in a model with a more realistic treatment of the labor market.

Keywords: Optimal non-linear income taxation; unemployment benefits

JEL-codes: H21; J22; J41; J64

16 pages, January 15, 2003

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