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The Credibility Problem in Unemployment Insurance Policy

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  • Robert A. J. Dur

Abstract

This paper studies the interaction between trade unions, which set wages, and a policymaker, who decides on the level of unemployment benefits and taxes. If the policymaker cannot commit to future policies, taxes and benefits are excessively high in equilibrium. Moreover, employment and output are inefficiently low. Appointing a policymaker who is more conservative than the median voter may solve the credibility problem. Alternatively, increasing wage flexibility may make the credibility problem less severe. Finally, I argue that, when evaluated behind a veil of ignorance, the credibility problem may be a blessing rather than a curse.

Suggested Citation

  • Robert A. J. Dur, 2001. "The Credibility Problem in Unemployment Insurance Policy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(4), pages 634-650, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200112)157:4_634:tcpiui_2.0.tx_2-k
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    Cited by:

    1. Corneo, Giacomo, 2008. "Charity and redistributive taxation in a unionized economy," Labour Economics, Elsevier, vol. 15(5), pages 831-843, October.
    2. Fenge, Robert & Friese, Max, 2021. "Should unemployment insurance be centralized in a state union? Unearthing a principle of efficient federation building," Thuenen-Series of Applied Economic Theory 162, University of Rostock, Institute of Economics, revised 2021.

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    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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