This paper explores the optimal social insurance system against
unemployment both theoretically and empirically. Using a simple theoretical
framework we show that unemployment insurance provides insurance
against unemployment risk and enhances distributional equity, whereas selfinsurance
through borrowings promotes intertemporal consumption smoothing
and maintains incentives of individuals. Then we use Korean and U.S.
panel data sets to simulate the welfare effects of various insurance systems.
Simulation results demonstrate that the intertemporal income smoothing
effect of self-insurance is fairly strong: even for a small degree of moral
hazard associated with UI, increasing the portion of self-insurance improves
social welfare. This continues to hold even when the government provides
some retirement subsidy to poor individuals unless the moral hazard created
by government policies is very serious. We also discuss some interesting
differences between Korean data-based analysis and U.S. data-based
analysis.