Federal Unemployment Reinsurance Amid Local Labor-Market Policy

Marek Ignaszak (ignaszak@uni-frankfurt.de), Philip Jung (philip.jung@tu-dortmund.de) and Keith Kuester (keith.kuester@uni-bonn.de)

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Consider a union of atomistic member states. Idiosyncratic business-cycle shocks cause persistent differences in unemployment. Private cross-border risk-sharing is limited. A federal unemployment-based reinsurance scheme can provide transfers to member states in recession, which helps stabilize local unemployment. Limits to federal generosity arise because member states control local labor-market policies. Calibrating the economy to a stylized European Monetary Union, we find that moral hazard puts notable constraints on the effectiveness of federal reinsurance. This is so even if payouts are indexed to member state’s usual unemployment rate or if the federal level pays only in severe-enough recessions.

Keywords: Unemployment reinsurance; fiscal risk sharing; labor-market policy; fiscal federalism; search and matching (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 H77 (search for similar items in EconPapers)
Pages: 88
Date: 2023-04
New Economics Papers: this item is included in nep-dge, nep-eec, nep-lab and nep-ure
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