Seminar Papers,
Stockholm University, Institute for International Economic Studies

Abstract: Two features distinguish European and US labor markets. First, most European countries have substantially more generous unemployment insurance. Second, the duration of unemployment and employment spells are substantially higher in Europe - employment turnover is lower. We show that self-insurance, i.e., saving and borrowing, is a good substitute for unemployment insurance when turnover is high as in the US. If the insurance system is less than perfectly actuarially fair, the employed median voter will prefer to self-insure instead of having unemployment insurance if turnover is high. We also show that high unemployment insurance make unemployed more willing to wait for a job with low separation rates. This could make both high turnover/low insurance (US) and low turnover/high insurance (Europe) stable equilibria. Low turnover also leads to a strong divergence between the long and short run interest of the employed. In abscence of devices such that the median voter can bind future voters to some level of insurance, the voting cycle must thus be long in order to support a high level of insurance.

Keywords: labor markets; unemployment insurance; employment turnover; self-insurance; median voter; stable equilibria

JEL-codes: J60; J65

36 pages, October 31, 1997

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