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Buffer funding of unemployment insurance in a dynamic labour union model

  • Marja-Liisa Halko

    (University of Helsinki, Department of Economics)

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    In this paper we study the implications of the unemployment insurance (UI) financing system on wage levels and employment when labour markets are unionised and the revenues of the firms are stochastic. We use the basic monopoly union approach of wage and employment determination and assume that unemployment benefits are financed by employees’ UI contributions to the union’s UI fund and by the government’s tax revenue. The main focus of this paper is on the effects of UI buffer funding on employment fluctuations. We show that, compared with the pay- as-you-go financing system, buffer funding stabilises the economy by decreasing employment fluctuations where wages are flexible. If wages are rigid, buffer funding stabilises net wage variations, but has hardly any effect on employment fluctuations.

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    Paper provided by EconWPA in its series Macroeconomics with number 0404030.

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    Date of creation: 27 Apr 2004
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    Handle: RePEc:wpa:wuwpma:0404030
    Note: Type of Document - pdf
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    1. Coles, Melvyn & Smith, Eric, 1998. "Strategic bargaining with firm inventories," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 35-54, September.
    2. Holmlund, Bertil & Lundborg, Per, 1999. "Wage bargaining, union membership, and the organization of unemployment insurance," Labour Economics, Elsevier, vol. 6(3), pages 397-415, September.
    3. Manning, Alan, 1993. " A Dynamic Model of Union Power, Wages and Employment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(2), pages 175-93.
    4. repec:fth:starer:8415 is not listed on IDEAS
    5. Oswald, Andrew J, 1985. " The Economic Theory of Trade Unions: An Introductory Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 160-93.
    6. Melvyn G. Coles & Andrew K. G. Hildreth, 2000. "Wage Bargaining, Inventories, and Union Legislation," Review of Economic Studies, Oxford University Press, vol. 67(2), pages 273-293.
    7. Ripatti, Antti & Vilmunen, Jouko, 2001. "Declining labour share : Evidence of a change in the underlying production technology," Research Discussion Papers 10/2001, Bank of Finland.
    8. Erkki Koskela & Ronnie Schöb, 1999. "Does the Composition of Wage and Payroll Taxes Matter Under Nash Bargaining?," Discussion Papers 203, Government Institute for Economic Research Finland (VATT).
    9. Holmlund, Bertil & Lundborg, Per, 1989. "Unemployment insurance schemes for reducing the natural rate of unemployment," Journal of Public Economics, Elsevier, vol. 38(1), pages 1-15, February.
    10. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
    11. Kidd, David P & Oswald, Andrew J, 1987. "A Dynamic Model of Trade Union Behaviour," Economica, London School of Economics and Political Science, vol. 54(215), pages 355-65, August.
    12. Leach, John, 1997. "Inventories and Wage Bargaining," Journal of Economic Theory, Elsevier, vol. 75(2), pages 433-463, August.
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