The redistributive role of unemployment benefits

This paper evaluates the role of unemployment benefits as a tool for redistribution. In a setting with worker heterogeneity, the provision of unemployment benefits achieves two goals: it provides insurance to workers in the event of job loss and it redistributes wealth from individuals with more to those with fewer economic opportunities. Our model features a frictional labour market and an incomplete financial market. When calibrated to match stylised facts of the US economy, the optimal level of unemployment benefits is broadly similar regardless of whether workers differ in economic opportunities. This suggests that taking into consideration the redistributive nature of unemployment benefits has only a limited role in altering the optimal level of unemployment benefits.