The Effects of Unemployment Compensation in General Equilibrium with Search Unemployment

It is shown that when the effects of an increase in unemployment subsidies are studied in a general equilibrium framework, unemployment increases far less than in a "partial-partial" model. In fact, the result may very well be a decrease in unemployment if the "general equilibrium forces" are strong enough. In the model used in this paper, an increase in unemployment compensation unambiguously decreases the rate of unemployment.