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Should Unemployment Insurance be Centralized in a State Union?

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  • Robert Fenge
  • Max Friese

Abstract

This paper compares the decentral organization of unemployment insurance in member states of a state union with the central organization at the upper union’ level. In a model of two countries the labor force and the firm owners can migrate between the states. Labor markets exhibit unemployment due to trade union’s bargaining about the wage rate. In a decentral scenario the states organize independently unemployment insurance and decide about the rate on wages contributed to the insurance budget. Due to open borders they have to take account of migration effects. However, with perfect mobility between the states each government chooses a socially optimal contribution rate such that workers are fully insured against unemployment. In the central scenario the governments overestimate the costs of insurance when bargaining about the contribution rate and observing the common insurance budget of both countries. This leads to a less than socially optimal contribution rate.

Suggested Citation

  • Robert Fenge & Max Friese, 2018. "Should Unemployment Insurance be Centralized in a State Union?," CESifo Working Paper Series 6898, CESifo.
    • Handle: RePEc:ces:ceswps:_6898
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6898.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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

    Keywords

    unemployment insurance policy; state union; centralization; migration externalities;
    All these keywords.

    JEL classification:

    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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