Paper #605

Title:

Equilibrium unemployment insurance

Authors:

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

Date:

April 1998 (Revised: June 1999)

Abstract:

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 whichmay 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.

Keywords:

Comparative advantege, employment, political equilibrium, search, specialization, unemployment insurance

JEL codes:

D72, E24, J24, J64, J65

Area of Research:

Macroeconomics and International Economics

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