DP15465 Federal unemployment reinsurance and local labor-market policies

Author(s): Marek Ignaszak, Philip Jung, Keith Kuester
Publication Date: November 2020
Keyword(s): Fiscal Federalism, labor-market policy, Search and Matching, Unemployment reinsurance
JEL(s): E24, E32, E62
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15465

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.