Should Unemployment Benefits Be Related to Previous Earnings?

In most OECD countries, unemployment benefits are tied to individual previous labor earnings. We study the progressivity of this indexation in a calibrated general-equilibrium overlapping-generations model with flexible labor supply, keeping the government expenditures on unemployment insurance constant over the different scenarios. We find that higher indexation of unemployment benefits to previous earnings has only small quantitative effects on output, employment, the distribution of income, and welfare. We also provide a tentative analysis of the most recent Hartz IV reform, where unemployment benefits decrease sharply after one year of unemployment. This reform is found to have positive but very small efficiency and welfare effects.