Unemployment Insurance and Cultural Transmission: Theory and Application to European Unemployment

Jean-Baptiste Michau

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper emphasizes the two-way causality between the provision of unemployment insurance andthe cultural transmission of work ethic. Values affect the size of the moral-hazard problem and, hence,the policy to be implemented. Conversely, when parents rationally choose how much effort to exert toraise their children to work hard, they form expectations on the policy that will be implemented by thenext generation. In this context, I determine the dynamics of preferences across generations and showthat the different cultural traits, i.e. high and low work ethics, are complementary. The model couldgenerate a lag between the introduction of unemployment insurance and a deterioration of the workethic. Relying on a calibration, I argue that it can account for a substantial fraction of the history ofEuropean unemployment since World War II. As this explanation is compatible with the co- existenceof generous unemployment insurance and low unemployment in the 1950s and 1960s, it could be seenas an alternative to the dominant story that relies on the occurrence of large shocks since the 1970s.Supportive empirical evidence is provided.

Keywords: cultural transmission; European unemployment; unemployment insurance; work ethic (search for similar items in EconPapers)
JEL-codes: E24 H31 J65 Z10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias, nep-lab, nep-ltv and nep-mac
Date: 2009-06
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