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Should unemployment insurance be centralized in a state union? Unearthing a principle of efficient federation building

Robert Fenge and Max Friese

No 162, Thuenen-Series of Applied Economic Theory from University of Rostock, Institute of Economics

Abstract: Our study compares the efficiency of unemployment insurance programs in a state union. A centralized insurance pools the cost of unemployment which implies a collective bargaining in the countries that leads to excessively high wages and inefficient insurance. Those high wages attract workers who reduce the outsourced economic cost of unemployment. Only with perfect mobility, this opposing migration effect completely outweighs the pooling effect, and the insurance is no longer inefficient when centralized. Furthermore, we conclude that a principle of efficient federal systems might be that fiscally linked economic policies and institutions should be governed on the same federative level.

Keywords: unemployment insurance; imperfect labor markets; federal state union; centralization; migration; vertical fiscal externality (search for similar items in EconPapers)
JEL-codes: F22 F66 H77 J65 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ias, nep-lab, nep-ore and nep-pbe
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