Optimal unemployment policy in a matching equilibrium

Melvyn Coles

Research output: Contribution to journalArticlepeer-review


This paper considers optimal unemployment policy in a matching equilibrium with risk averse workers and unobserved job search effort. The Planner chooses unemployment benefits, taxes and job creation subsidies to maximise a Utilitarian welfare function. Optimal policy involves a trade-off between higher employment taxes (which finance more generous unemployment benefits) and greater market tightness (which reduces the average unemployment spell). Optimal UI implies the initial UI payment equals the wage, thus ensuring consumption is smooth across the job destruction shock, and UI payments then fall with duration.

Original languageEnglish (US)
Pages (from-to)537-559
Number of pages23
JournalLabour Economics
Issue number4
StatePublished - Aug 2008


  • Equilibrium matching
  • Unemployment insurance
  • Unobserved search effort

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management


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