Discussion paper

DP15465 Federal unemployment reinsurance and local labor-market policies

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.


Kuester, K, P Jung and M Ignaszak (2020), ‘DP15465 Federal unemployment reinsurance and local labor-market policies‘, CEPR Discussion Paper No. 15465. CEPR Press, Paris & London. https://cepr.org/publications/dp15465