Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 665: Equilibrium Unemployment Insurance

John Hassler (), José Mora (), Kjetil Storesletten () and Fabrizio Zilibotti ()
Additional contact information
John Hassler: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
José Mora: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Kjetil Storesletten: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Fabrizio Zilibotti: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: In this paper, we introduce a positive theory of unemployement insurance into a dynamic overlapping generations model with search-matching frictions and on-the-job learning-by-doing. The model shows that societies populated by identical rational agents, but differing in the initial distribution of human capital accross agents, may choose very different unemployment insurance levels into a politico-economic equilibrium. The interaction between the political decision about the level of the unemployment insurance and the optimal search behavior of the unemployed gives rise to a self-reinforcing mechanism which may generate multiple steady-state equilibria. In particular, a European-type steady-state with high unemployment, low employment turnover and high insurance can co-exist with an American-type steady state with low unemployment, high employment turnover and low unemployment insurance. A calibrated version of the model features two distinct steady-state equilibria with unemployment levels and duration rates resembling those of the US and Europe respectively.

Keywords: Comparative Advatage; Employment; Political Equilibrium; Search; Specialization; Unemployment Insurance

JEL-codes: D72; E21; E24; J21; J24; J31; J64; J65

55 pages, January 28, 1999

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