TAILIEUCHUNG - SOME ASPECTS OF OPTIMAL UNEMPLOYMENT INSURANCE

Social funds should not replace the public sector in tasks that are the government’s inherent responsibility. To do so can undermine ongoing public sector reform and institution-building programs. The objective of funds should be to reinforce and broaden, rather than supplant, the role of state institutions in the social field. Undoubtedly, in many countries, fund portfolios are going to continue to have schools and health posts and other such social projects because funds have been shown to be effective in that role. However, that is really an interim solu- tion until the management and operational procedures developed by funds can be transferred to the social ministries or to the. | Journal of Public Economics 10 1978 379-402. North-Holland Publishing Company SOME ASPECTS OF OPTIMAL UNEMPLOYMENT INSURANCE Martin Neil BAILY Yale University New Haven CT 1 6520 . Received September 1977 revised version received August 1978 The original version of this paper was written for the Office of ASPER of the . Department of Labor in 1975. This is a revision of Unemployment insurance as a social insurance program presented at the ISPE Conference on Social Insurance held near Tokyo Japan in May 1977. I would like to thank participants at this conference . Baily . Fields and the referees for helpful comments. My recent work on this topic has been funded by the National Science Foundation. I. Introduction The possibility of becoming unemployed represents an important source of income uncertainty for workers. All advanced economies and even many developing economies have responded to the existence of this uncertainty by providing a program of unemployment insurance UI . In all cases I know of this program is provided by the public sector although there are sometimes supplementary union-related private programs as well. At the time the US program was initiated there was some recognition that when a worker is unemployed there are both voluntary and involuntary aspects involved. There are several provisions that are designed to eliminate what were seen as possible abuses of the program. For example recipients are required to register with the Employment Service and to actively seek work 1 while firms pay taxes into the program based upon an experience-rating. The more recent development of search theory has brought out clearly that the intensity with which people search for jobs and the wage they are willing to accept are key determinants of the length of a spell of unemployment. This means in turn that the payment of UI benefits will change the behavior of individuals and the length of spells of unemployment. Martin Feldstein 1973 1974 has been one

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