Working Paper: CEPR ID: DP15465
Authors: Keith Kuester; Philip Jung; Marek Ignaszak
Abstract: Consider a union of atomistic member states, each faced with idiosyncratic business-cycle shocks. Private cross-border risk-sharing is limited, giving a role to a federal unemployment-based transfer scheme. Member states control local labor-market policies, giving rise to a trade-off between moral hazard and insurance. Calibrating the economy to a stylized European Monetary Union, we find notable welfare gains if the federal scheme's payouts take the member states' past unemployment level as a reference point. Member states' control over policies other than unemployment benefits can limit generosity during the transition phase.
Keywords: unemployment; reinsurance; labor market policy; fiscal federalism; search and matching
JEL Codes: E32; E24; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| federal unemployment reinsurance (ri) (J65) | local labor market policies (J48) |
| federal unemployment reinsurance (ri) (J65) | welfare gains (D69) |
| federal unemployment reinsurance (ri) (J65) | employment levels (J23) |
| federal unemployment reinsurance (ri) (J65) | stabilization during economic fluctuations (E63) |
| federal unemployment reinsurance (ri) (J65) | consumption and employment volatility (E20) |
| federal unemployment reinsurance (ri) (J65) | optimal federal ri scheme (H55) |
| local labor market policies (J48) | optimal generosity of federal ri (D64) |
| member states' fluctuations in national income (F40) | federal ri scheme design (H77) |
| federal unemployment reinsurance (ri) (J65) | tradeoff between insurance and moral hazard (G52) |