Home Production and the Optimal Rate of Unemployment Insurance

Home Production and the Optimal Rate of Unemployment Insurance

Title : Home Production and the Optimal Rate of Unemployment Insurance
Number : 12/20
Author(s) : Temel Taşkın
Language : English
Date : June 2012
Abstract : In this paper, we incorporate home production into a quantitative model of unemployment and show that realistic levels of home production have a significant impact on the optimal unemployment insurance rate. Motivated by recently documented empirical facts, we augment an incomplete markets model of unemployment with a home production technology, which allows unemployed workers to use their extra non-market time as partial insurance against the drop in income due to unemployment. In the benchmark model, we find that the optimal replacement rate in the presence of home production is roughly 40% of wages, which is 40% lower than the no home production model’s optimal replacement rate of 65%. The 40% optimal rate is also close to the estimated rate in practice. The fact that home production makes a significant difference in the optimal unemployment insurance rate is robust to a variety of parameterizations and alternative model environments.
Keywords : Unemployment insurance, Home production, Incomplete markets, Self-insurance
JEL Codes : D13; E21; J65

Home Production and the Optimal Rate of Unemployment Insurance
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