Paper #604

Title:

A positive theory of geographic mobility and social insurance

Authors:

John Hassler, José V. Rodríguez Mora, Kjetil Storesletten and Fabrizio Zilibotti

Date:

August 2001

Abstract:

This paper presents a tractable dynamic general equilibrium model that can explain cross-country empirical regularities in geographical mobility, unemployment and labor market institutions. Rational agents vote over unemployment insurance (UI), taking the dynamic distortionary effects of insurance on the performance of the labor market into consideration. Agents with higher cost of moving, i.e., more attached to their current location, prefer more generous UI. The key assumption is that an agent's attachment to a location increases the longer she has resided there. UI reduces the incentive for labor mobility and increases, therefore, the fraction of attached agents and the political support for UI. The main result is that this self-reinforcing mechanism can give rise to multiple steady-states-one 'European' steady-state featuring high unemployment, low geographical mobility and high unemployment insurance, and one 'American' steady-state featuring low unemployment, high mobility and low unemployment insurance.

Keywords:

Employment, migration, geographical mobility, political equilibrium, unemployment insurance, voting

JEL codes:

D72, E24, J24, J64, J65

Area of Research:

Macroeconomics and International Economics

Published in:

International Economic Review, 46 (2005), 1 (02), pp. 263-303

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