Template-Type: ReDIF-Paper 1.0
Title: Federal Unemployment Reinsurance Amid Local Labor-Market Policy
Author-Name: Marek Ignaszak
Author-Email: ignaszak@uni-frankfurt.de
Author-Name: Philip Jung
Author-Email: Philip.Jung@tu-dortmund.de
Author-Name: Keith Kuester
Author-Email: keith.kuester@uni-bonn.de
Classification-JEL: E32, E24, E62, H77
Keywords: Unemployment reinsurance, fiscal risk sharing, labor-market policy,
fiscal federalism, search and matching

Abstract: Consider a union of atomistic member states. Idiosyncratic business-cycle shocks
cause persistent differences in unemployment. Private cross-border risk-sharing is
limited. A federal unemployment-based reinsurance scheme can provide transfers
to member states in recession, which helps stabilize local unemployment. Limits to
federal generosity arise because member states control local labor-market policies.
Calibrating the economy to a stylized European Monetary Union, we find that moral
hazard puts notable constraints on the effectiveness of federal reinsurance. This is
so even if payouts are indexed to member state’s usual unemployment rate or if the
federal level pays only in severe-enough recessions.

Note: 
Length: 88
Creation-Date: 2023-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp419
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_419