Incentive and Insurance Effects of Tax Financed Unemployment Insurance

Torben M Andersen

No 8025, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The potential distortions of job-search incentives caused by unemployment benefits and their financing are well known. However, a benefit-tax scheme also provides insurance having direct utility effects as well as indirect effects on risk taking. The latter mitigates or may even dominate standard incentive effects to produce a non-monotone relation between efficiency (incentives) and equity (insurance). This implies that an increase in both benefits and the tax rate up to some point may increase average income and reduce inequality, i.e., there is not necessarily a trade-off between considerations for efficiency and equity. However, optimal utilitarian policies always position the economy at a point where marginal policy changes involve a trade-off, otherwise policies would not be optimal.

Keywords: Incentives; Risk sharing; Search; Unemployment benefits (search for similar items in EconPapers)
JEL-codes: D80 J20 J65 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-ias and nep-lab
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Citations: View citations in EconPapers (5)

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