An essay in macroeconomics

Official URL: https://risc01.sabanciuniv.edu/record=b2749000_(Table of contents)

This paper investigates the impact of unemployment insurance on the unemployment rate, wages, welfare, firms’ growth, and profitability. To that end, I extend Acemoglu and Hawkins (2014)’s random search model by incorporating unemployment insurance. In order to ascertain the impact of UI, I conduct a quantitative analysis by calibrating my model to the U.S economy. The quantitative analysis states the following results: As the proportionate tax rate on earnings rises, the flow values of unemployment and employment rise, peak, then fall, respectively. This behavior is reflected in social welfare: it reaches the peak at a 1.7 percent tax rate and then declines. The higher tax rate leads to higher wages which in turn causes a decrease in the number of vacancies posted by firms. Accordingly, This increases the unemployment rate and decreases the labor market tightness. Further, the increase in wage levels results in declining in firms’ growth rate and profit rate. Lastly, I also examine the impulse response of our key variables to a 1.7 percent proportional unemployment insurance tax. My analysis points out that the response of our key variables (wages, the flow value of unemployment and employment, labor market tightness, and welfare) shows their persistence.