Discussion Paper Details

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Title: Federal unemployment reinsurance and local labor-market policies

Author(s): Marek Ignaszak, Philip Jung and Keith Kuester

Publication Date: November 2020

Keyword(s): Fiscal Federalism, labor-market policy, Search and Matching and Unemployment reinsurance

Programme Area(s): Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Ignaszak, M, Jung, P and Kuester, K. 2020. 'Federal unemployment reinsurance and local labor-market policies'. London, Centre for Economic Policy Research.