Working Paper: CEPR ID: DP2126
Authors: John Hassler; Jos V. RodrÃguez Mora; Kjetil Storesletten; Fabrizio Zilibotti
Abstract: In this paper, we incorporate a positive theory of unemployment insurance into a dynamic overlapping generations model with search-matching frictions and on-the-job learning-by-doing. The model shows that societies populated by identical rational agents, but differing in the initial distribution of human capital across agents, may choose very different unemployment insurance levels in a politico-economic equilibrium. The interaction between the political decision about the level of the unemployment insurance and the optimal search behavior of the unemployed gives rise to a self-reinforcing mechanism which may generate multiple steady-state equilibria. In particular, a European-type steady-state with high unemployment, low employment turnover and high insurance can co-exist with an American-type steady-state with low unemployment, high employment turnover and low unemployment insurance. A calibrated version of the model features two distinct steady-state equilibria with unemployment levels and duration rates resembling those of the U.S. and Europe, respectively.
Keywords: comparative advantage; employment; political equilibrium; search; specialization; unemployment insurance
JEL Codes: D72; E24; J24; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment insurance level (J65) | agents' search behavior (L85) |
| agents' search behavior (L85) | labor market outcomes (J48) |
| political choices over unemployment insurance (J65) | economic performance (P17) |
| identity of politically preponderant agents (P26) | political choices regarding unemployment insurance (J65) |
| political choices regarding unemployment insurance (J65) | unemployment insurance levels (J65) |
| specialized workers' preferences for unemployment insurance (J65) | political support for high insurance levels (G52) |
| unspecialized workers' preferences for unemployment insurance (J65) | political support for low insurance levels (G52) |
| political support for high insurance levels (G52) | divergent economic performances between U.S. and Europe (P17) |
| political support for low insurance levels (G52) | divergent economic performances between U.S. and Europe (P17) |