On the Time Sequence of Unemployment Benefits When Search is Costly

Should we cut the level of unemployment benefits, or reduce their potential duration? The answer depends on the way the unemployed search behaviour and unemployment insurance schemes interact. In this paper, we consider that unemployment insurance funds can be used to improve search. Resulting hazards are increasing over the unemployment spell prior to the exhaustion of benefits, and plummet immediately after it. Turning to policy implications, we assume the public decision-maker aims to minimize the average duration of unemployment under a resource constraint. First, we show the stationary relationship between average unemployment duration and unemployment benefit is hump-shaped. Second, raising benefits over a short duration can reduce average duration. Finally, we demonstrate that most of the time, a declining (yet always positive) benefit scheme is optimal