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Employment and Welfare Effects of a Two-Tier Unemployment Compensation System

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  • Heer, Burkhard

Abstract

In Germany, as in many OECD countries, such as the United Kingdom, unemployment compensation consists of unemployment insurance and unemployment assistance. Unemployment assistance is provided subsequent to the expiration of entitlement to unemployment insurance and is lower. The effects of this two-tier unemployment compensation system are studied in a general equilibrium job search model with endogenous distributions of income, wealth, and employment which is calibrated with regard to the characteristics of the German economy. Our results are as follows: (i) employment is a decreasing function of both unemployment insurance and unemployment assistance. (ii) Aggregate savings are (not) a monotone decreasing function of unemployment assistance (unemployment insurance) payments. (iii) Optimal unemployment compensation payments are found to be a decreasing function over time. Copyright 2003 by Kluwer Academic Publishers

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  • Heer, Burkhard, 2003. "Employment and Welfare Effects of a Two-Tier Unemployment Compensation System," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(2), pages 147-168, March.
  • Handle: RePEc:kap:itaxpf:v:10:y:2003:i:2:p:147-68
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    Cited by:

    1. Heer, Burkhard & Trede, Mark, 2003. "Efficiency and distribution effects of a revenue-neutral income tax reform," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 87-107, March.
    2. Burkhard Heer, 2006. "Should Unemployment Benefits Be Related to Previous Earnings?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 530-550, December.
    3. Peter Fredriksson & Bertil Holmlund, 2006. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 357-386, July.
    4. Andreas Pollak, 2005. "Optimal Unemployment Insurance and Voting," Computational Economics 0505002, EconWPA.
    5. Gabriele Cardullo & Bruno Van der Linden, 2007. "Employment Subsidies and Substitutable Skills: An Equilibrium Matching Approach," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 53(4), pages 375-404.
    6. Andreas Pollak, 2005. "Optimal Unemployment Insurance in a Search Model with Variable Human Capital," Computing in Economics and Finance 2005 324, Society for Computational Economics.
    7. Burkhard Heer & Albrecht Morgenstern, 2005. "The Labor Market Effects of Indexing Unemployment Benefits to Previous Earnings," Public Finance Review, , vol. 33(3), pages 385-402, May.
    8. Hassler, John & Rodriguez Mora, José V., 2002. "Should UI Benefits Really Fall Over Time?," IZA Discussion Papers 622, Institute for the Study of Labor (IZA).
    9. Pollak, Andreas, 2007. "Optimal unemployment insurance with heterogeneous agents," European Economic Review, Elsevier, vol. 51(8), pages 2029-2053, November.
    10. Vodopivec, Milan & Raju, Dhushyanth, 2002. "Income support systems for the unemployed : issues and options," Social Protection and Labor Policy and Technical Notes 25529, The World Bank.
    11. Milan Vodopevic, 2004. "Comparing Unemployment Insurance and Unemployment Assistance," World Bank Other Operational Studies 11811, The World Bank.

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