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UNEMPLOYMENT INSURANCE AND THE BUSINESS CYCLE: SHOULD BENEFIT ENTITLEMENT DURATION REACT TO THE CYCLE?

Published online by Cambridge University Press:  02 October 2012

Stéphane Moyen  and
Nikolai Stähler
Stéphane Moyen*
Affiliation:
Deutsche Bundesbank
Nikolai Stähler
Affiliation:
Deutsche Bundesbank
*
Address correspondence to: Stéphane Moyen, Deutsche Bundesbank, Research Department, Wilhelm-Epstein-Str. 14, 60431 Frankfurt a.M., Germany; e-mail: stephane.moyen@bundesbank.de.
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Abstract

The aim of this paper is to study the optimal duration of unemployment benefit entitlement across the business cycle. We analyze whether the entitlement duration should be prolonged in bad and shortened in good times. Because of consumption smoothing, such a countercyclical policy can be welfare-enhancing as long as it does not affect labor market adjustment too severely and/or as long as it can even help to reduce inefficiencies there. If, however, the labor market is already quite inflexible, procyclical behavior may be preferable. In a calibrated dynamic business cycle framework, we find that countercyclical benefit entitlement duration may be preferable in the United States but not in Europe.

Keywords

Unemployment InsuranceEntitlement DurationBusiness Cycle
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 3 , April 2014 , pp. 497 - 525
Copyright
Copyright © Cambridge University Press 2012 

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