May 2016

IZA DP No. 9967: Optimal Unemployment Benefit Policy and the Firm Productivity Distribution

published in: International Tax and Public Finance 2017, 24, 36-59

This paper provides a novel justification for a declining time profile of unemployment benefits that does not rely on moral hazard or consumption-smoothing considerations. We consider a simple search environment with homogeneous workers and low- and high-productivity firms. By introducing a declining time profile of benefits, the government can affect the equilibrium wage profile in a manner that enhances the sorting of workers across low- and high-productivity firms. We demonstrate that optimal government policy depends on the dispersion and skewness of the firms' productivity distribution.