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Equilibrium Unemployment Insurance

  • Hassler, John

    ()

    (Institute for International Economic Studies, Stockholm University)

  • Mora, José

    ()

    (Institute for International Economic Studies, Stockholm University)

  • Storesletten, Kjetil

    ()

    (Institute for International Economic Studies, Stockholm University)

  • Zilibotti, Fabrizio

    ()

    (Institute for International Economic Studies, Stockholm University)

In this paper, we introduce a positive theory of unemployement insurance into a dynamic overlapping generations model with search-matching frictions and on-the-job learning-by-doing. The model shows that societies populated by identical rational agents, but differing in the initial distribution of human capital accross agents, may choose very different unemployment insurance levels into a politico-economic equilibrium. The interaction between the political decision about the level of the unemployment insurance and the optimal search behavior of the unemployed gives rise to a self-reinforcing mechanism which may generate multiple steady-state equilibria. In particular, a European-type steady-state with high unemployment, low employment turnover and high insurance can co-exist with an American-type steady state with low unemployment, high employment turnover and low unemployment insurance. A calibrated version of the model features two distinct steady-state equilibria with unemployment levels and duration rates resembling those of the US and Europe respectively.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 665.

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Length: 55 pages
Date of creation: 28 Jan 1999
Date of revision:
Handle: RePEc:hhs:iiessp:0665
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