Optimal Unemployment Insurance, with Human Capital Depreciation, and Duration Dependence

This paper introduces the possibility of a deterioration in job opportunities during unemployment into the standard optimal unemployment insurance (UI) design framework, and characterizes the effcient UI scheme. The optimal program may display two novel features, which cannot be present in stationary models. First, UI transfers are bounded below by a minimal assistance level that arises endogenously in the efficient contract. Second, the optimal scheme implies a wage subsidy for longterm unemployed workers. Numerical simulations based on the Spanish and US economies suggest that both assistance transfers and wage subsidies should be part of the UI scheme in these countries.