Date Added: Jun 2011
The authors study how the level of Unemployment Insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, they find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, their evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate their model, they find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate.