Abstract
AbstractOur study compares the efficiency of unemployment insurance programs in a state union. A centralized insurance will pool the cost of unemployment; this results in a collective bargaining in the member states, which leads to excessively high wages and inefficient insurance. Those high wages attract workers who reduce the outsourced economic cost of unemployment. Only with perfect mobility, this opposing migration effect completely outweighs the pooling effect, and the insurance is no longer inefficient when centralized. Furthermore, we conclude that a principle of efficient federal systems might be that fiscally linked economic policies and institutions should be governed on the same federative level.
Highlights
Should the social security systems of member states be centralized in a state union or remain in the single country’s competence? In the European Union, the concept of a centralized European unemployment insurance system has often been proposed and discussed (Beblavyand Lenaerts, 2017, Andor et al, 2014)
We have shown that a centralized unemployment insurance system induces a vertical fiscal externality at the level of wage bargaining in the states because negotiators can partly externalize the cost of higher wages and increase them above efficient levels
Should unemployment insurance be centralized in a state union? This paper presents two answers
Summary
Should the social security systems of member states be centralized in a state union or remain in the single country’s competence? In the European Union, the concept of a centralized European unemployment insurance system has often been proposed and discussed (Beblavyand Lenaerts, 2017, Andor et al, 2014). The French prime minister argued in favor of a common European unemployment insurance in order to redistribute resources from economically more successful countries to less successful ones This debate deals with the stabilizing function of a common unemployment insurance program, where centralization serves as mutual interstate insurance against asymmetric economic shocks on the labor markets of individual member states. We assume ’large’ trade unions and firm associations which means that the effects of the wage bargain on macroeconomic variables like the unemployment rate and the governmental insurance budget are taken into account.1 Under both types of unemployment insurance, decentralized or centralized, the government determines the contribution rate of wages to balance the insurance budget. In the decentralized regime the contribution rate is set efficiently irrespective of firms’ and workers’ mobility costs, implying that full insurance against the risk of unemployment is provided This result is obtained even for asymmetric states.. The model; section 4 determines the social optimum; section 5 discusses the behavior of the trade union, the firm association and the government in a decentralized setting; section 6 proceeds with the centralized organization of unemployment insurance; and section 7 concludes
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