Discussion Paper Details

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Title: Equilibrium Unemployment Insurance

Author(s): John Hassler, José Vicente Rodríguez Mora, Kjetil Storesletten and Fabrizio Zilibotti

Publication Date: April 1999

Keyword(s): Comparative Advantage, Employment, Political Equilibrium, Search, Specialization and Unemployment Insurance

Programme Area(s): International Macroeconomics and Labour Economics

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.

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Bibliographic Reference

Hassler, J, Rodríguez Mora, J, Storesletten, K and Zilibotti, F. 1999. 'Equilibrium Unemployment Insurance'. London, Centre for Economic Policy Research.