Scandinavian Working Papers in Economics
Seminar Papers,
Stockholm University, Institute for International Economic Studies
No 705: A positive theory of geographical mobility and social insurance
John Hassler (), Jose 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
Jose Mora: Universitat Pompeu Fabra
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: This paper presents a tractable dynamic general equilibrium model that can explain cross-country empirical regularities in geographical mobility, unemployment and labor market institutions. Rational agents vote over unemployment insurance (UI), taking the dynamic distortionary effects of insurance on the performance of the labor market into consideration. Agents with higher cost of moving, i.e., more attached to their current location, prefer more generous UI. The key assumption is that an agent´s attachment to a location increases the longer she has resided there. UI reduces the incentive for labor mobility and increases, therefore, the fraction of attached agents and the political support for UI. The main result is that this self-reinforcing mechanism can give rise to multiple steady-states - one "European" steady-state featuring high unemployment, low geographical mobility and high unemployment insurance, and one "American" steady- state featuring low unemployment, high mobility and low unemployment insurance.
Keywords: Employment; Migration; Geographical Mobility; Political Equilibrium; Unemployment Insurance; Voting
JEL-codes: D72; E24; J24; J64; J65
53 pages, February 12, 2002
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