() and José V. Rodríguez Mora
John Hassler: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
José V. Rodríguez Mora: Department of Economics, Universitat Pompeu Fabra, Postal: Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain
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.
36 pages, October 31, 1997
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