Discussion paper

DP2126 Equilibrium Unemployment Insurance

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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Citation

Zilibotti, F, J Hassler, J Rodríguez Mora and K Storesletten (1999), ‘DP2126 Equilibrium Unemployment Insurance‘, CEPR Discussion Paper No. 2126. CEPR Press, Paris & London. https://cepr.org/publications/dp2126