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Can individual unemployment savings accounts resolve Okun's equity-efficiency trade-off?

Udo Kock () and A.G. den Butter

No 26, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: Recently some authors have proposed to introduce a system of individual unemployment savings accounts as an alternative to traditional public unemployment insurance. In this paper we investigate the feasibility of individual accounts as a possible alternative route to address the equity-efficiency trade-off of public benefit systems and increase labor force participation in Europe. Under a system of individual accounts, workers save a share of their wage in special accounts to draw unemployment compensation from these accounts when they are laid off. Individual accounts reduce the adverse incentives of traditional unemployment insurance because individuals internalize the costs of unemployment. The system might have negative consequences for labor market dynamics and restructuring, as it may harm the ‘irrigation function’ of unemployment benefits for the economy, when workers would be to willing to accept inefficient jobs, just to save on withdrawals from their accounts. Another adverse effect of individual accounts is that it may introduce dual labor markets and decrease solidarity between workers with a high and a low unemployment risk. We conclude that, despite the disadvantages, the idea of individual accounts deserves serious attention as this form of institutional innovation addresses the key problem of contemporary benefit systems in many European countries: low unemployment outflow rates and a high level of labor inactivity.

Keywords: unemployment benefits; equity and efficiency; moral hazard; labor market dynamics (search for similar items in EconPapers)
JEL-codes: E21 H53 J64 J65 J68 (search for similar items in EconPapers)
Date: 2001
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Handle: RePEc:vua:wpaper:2001-26