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Universal Basic Income versus Unemployment Insurance

Author

Listed:
  • Alice Fabre
  • Stéphane Pallage
  • Christian Zimmermann

Abstract

In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.

Suggested Citation

  • Alice Fabre & Stéphane Pallage & Christian Zimmermann, 2014. "Universal Basic Income versus Unemployment Insurance," CESifo Working Paper Series 5106, CESifo.
  • Handle: RePEc:ces:ceswps:_5106
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    References listed on IDEAS

    as
    1. Krueger, Alan B. & Mueller, Andreas, 2010. "Job search and unemployment insurance: New evidence from time use data," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 298-307, April.
    2. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    3. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    4. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-142, February.
    5. Bruno Van der Linden, 2004. "Active citizen's income, unconditional income and participation under imperfect competition: a welfare analysis," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 98-117, January.
    6. Mueller, Andreas, 2010. "On-the-job search and wage dispersion: New evidence from time use data," Economics Letters, Elsevier, vol. 109(2), pages 124-127, November.
    7. Pallage, Stephane & Zimmermann, Christian, 2005. "Heterogeneous labor markets and generosity towards the unemployed: an international perspective," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 88-106, March.
    8. Pallage, Stephane & Zimmermann, Christian, 2001. "Voting on Unemployment Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 903-923, November.
    9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    10. Bruno Van Der Linden, 2002. "Is Basic Income a Cure for Unemployment in Unionized Economies? A General Equilibrium Analysis," Annals of Economics and Statistics, GENES, issue 66, pages 81-105.
    11. James Meade., "undated". "Agathotopia," Hume Papers 16, David Hume Institute.
    12. repec:adr:anecst:y:2002:i:66:p:05 is not listed on IDEAS
    13. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Basic income: some issues
      by chris in Stumbling and Mumbling on 2015-01-27 20:01:38

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    Cited by:

    1. La, Jung Joo, 2023. "The macroeconomic effects of basic income funded by a land-holding tax in Korea," Journal of Policy Modeling, Elsevier, vol. 45(1), pages 1-9.
    2. Islam, Nizamul & Colombino, Ugo, 2018. "The case for NIT+FT in Europe. An empirical optimal taxation exercise," Economic Modelling, Elsevier, vol. 75(C), pages 38-69.
    3. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    4. Cremer, Helmuth & Roeder, Kerstin, 2015. "Means testing versus basic income: The (lack of) political support for a universal allowance," Economics Letters, Elsevier, vol. 136(C), pages 81-84.
    5. La, Jung Joo, 2023. "Macroeconomic effects of basic income funded by land holding tax," MPRA Paper 116151, University Library of Munich, Germany.
    6. Nizamul Islam & Ugo Colombino, 2018. "The case for negative income tax with flat tax in Europe. An empirical optimal taxation exercise," Working Papers 454, ECINEQ, Society for the Study of Economic Inequality.
    7. Ramesh Shrestha & Krishna Belbase & Sreya Belbase, 2020. "Towards a More Equitable and Just World: A Case for Universal Basic Income," Journal of Development Innovations, KarmaQuest International, vol. 4(2), pages 72-90, December.
    8. Andre Luduvice, 2021. "The Macroeconomic Effects of Universal Basic Income Programs," Working Papers 21-21, Federal Reserve Bank of Cleveland.

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    More about this item

    Keywords

    universal basic income; idiosyncratic shocks; unemployment insurance; heterogeneous agents; moral hazard;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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