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Should unemployment insurance be centralized in a state union? Unearthing a principle of efficient federation building

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  • Fenge, Robert
  • Friese, Max

Abstract

Our study compares the efficiency of centralized and decentralized unemployment insurance programs in a state union. We use a model of two countries with collective bargaining for regional gross wages. The labor force and the firms are partially mobile across the member states of the state union, which gives rise to distortive migration incentives. If unemployment insurance is organized centrally, trade unions negotiate inefficiently high wages due to a vertical fiscal externality. The central government generally cannot provide full unemployment insurance as long as migration is costly. In contrast, decentralized unemployment insurance in the member states is efficient irrespective of the degree of mobility and regional asymmetries. Furthermore, efficiency depends on the federal institutions. If the wage bargaining process on the labor markets is decentralized, then decisions about unemployment insurance made at the state level are superior to centralized public insurance. For the efficiency of a centralized unemployment insurance, it matters whether decisions in related institutions like cooperative wage bargaining are also centralized.

Suggested Citation

  • Fenge, Robert & Friese, Max, 2020. "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.
  • Handle: RePEc:zbw:roswps:162
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    References listed on IDEAS

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    More about this item

    Keywords

    unemployment insurance; imperfect labor markets; federal state union; centralization; migration; vertical fiscal externality;

    JEL classification:

    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • 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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