Optimal Unemployment Insurance in a Matching Equilibrium: The Role of Congestion and Thick-Market Externalities

• Authors: Melvyn Coles.
• BSE Working Paper: 206 | September 15

This paper characterises optimal unemployment insurance (UI) and optimal tax policy in an equilibrium matching framework where job search effort is unobserved by the Planner. Policy design takes into account congestion externalities (greater job search effort by an individual worker reduces the re-employment rate of other competing job seekers) and thick market externalities (greater job creation rates raise the welfare of the unemployed by making it easier to find work). A key contribution is that it characterises the optimal equilibrium trade-off between higher job creation rates (via lower employment taxes) and a more generous UI program.