Working Paper: CEPR ID: DP2964
Authors: John Hassler; Jos V. RodrÃguez Mora; Kjetil Storesletten; Fabrizio Zilibotti
Abstract: This Paper presents a tractable dynamic general equilibrium model that can explain cross-country empirical regularities in geographical mobility, unemployment and labour market institutions. Rational agents vote over unemployment insurance (UI), taking the dynamic distortionary effects of insurance on the performance of the labour market into consideration. Agents with higher cost of moving, i.e. more attached to their current location, prefer more generous UI. The key assumption is that an agent?s attachment to a location increases the longer they have resided there. UI reduces the incentive for labour mobility and increases, therefore, the fraction of attached agents and the political support for UI. The main result is that this self-reinforcing mechanism can give rise to multiple steady-states one ?European? steady-state featuring high unemployment, low geographical mobility and high unemployment insurance, and one ?American? steady-state featuring low unemployment, high mobility and low unemployment insurance.
Keywords: employment; geographical mobility; migration; political equilibrium; unemployment insurance; voting
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 |
|---|---|
| agent's attachment to a location (L85) | preference for more generous unemployment insurance (UI) (J65) |
| generosity of unemployment insurance (UI) (J65) | reduced incentive for labor mobility (J69) |
| reduced incentive for labor mobility (J69) | increased fraction of attached agents (Y50) |
| increased fraction of attached agents (Y50) | political support for generous unemployment insurance (UI) (J65) |
| political support for generous unemployment insurance (UI) (J65) | perpetuation of the cycle (E32) |