Business Cycle Dependent Unemployment Insurance

The consequences of cylical contingencies in unemployment insurance systems are considered in a

search-matching model allowing for shifts between “good” and “bad” states of nature. An argument

for state contingencies is that insurance arguments are stronger and incentive effects weaker in "bad" than in "good" states of nature. We con.rm this and show that cyclically dependent benefit levels not only provide better insurance but may have structural effects implying that the structural (average) unemployment rate decreases, although the variability of unemployment may increase.