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A feasible unemployment-based shock absorber for the Euro Area

Andrea Brandolini (), Francesca Carta () and Francesco D'Amuri ()

No 254, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper contributes to the debate on the design of a centralised fiscal tool absorbing country-specific negative shocks in the euro area. Based on theoretical insights, it identifies the broad characteristics that a shock absorber based on unemployment should have in order to be incentive-compatible and politically feasible. It then derives empirically the combination of activation thresholds, experience rating, eligibility criteria, and benefit generosity which define the systems offering the highest stabilisation for given levels of redistribution, accounting for the large variation in benefit take-up rates across European countries. The analysis suggests that the shock absorber should: i) give rise to macro cross-national transfers, mimicking those that would be generated by a notional euro-wide unemployment benefit scheme of minimal coverage and generosity; ii) be activated by a trigger; and iii) feature partial experience rating. The simulation results, confirmed by robustness checks, show that even systems that do not redistribute resources between countries can have a considerable stabilisation impact in the medium run. Low benefit take-up in Southern Europe substantially reduces the stabilisation properties and the size of the scheme.

Keywords: unemployment benefits; absorption of macroeconomic shocks; fiscal union. (search for similar items in EconPapers)
JEL-codes: E6 J65 H53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-lab and nep-mac
Date: 2014-11
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Related works:
Journal Article: A Feasible Unemployment-Based Shock Absorber for the Euro Area (2016) Downloads
Working Paper: A Feasible Unemployment-Based Shock Absorber for the Euro Area (2015) Downloads
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