Effects of Unemployment Insurance Benefits in a Life-Cycle Model

In a life-cycle model, we calculate the contribution of the generosity of unemployment insurance (UI) on the unemployment rates in Canada and the U.S. The model predicts a 0.81% difference in unemployment rates (one third of the actual difference) in these countries. Social welfare improves if the benefit ratio increases from 45 percent to 55 percent of the working income. Savings drop and average production level declines as a result of higher UI benefit payment. JEL Classification: E21; E24; C61; C63. Keyword: Self-insurance, heterogeneous consumers. We would like to thank Tasso Adamopoulos, Archishman Chakraborty, Berta Esteve-Volart, Wai-Ming Ho, and especially, Diego Restuccia for helpful suggestions. Corresponding author: Department of Economics, York University, Toronto, ON, Canada M3J 1P3. E-mail address: [email protected]. Department of Economics, York University, Toronto, ON, Canada M3J 1P3. E-mail address: [email protected].