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.