Optimal unemployment insurance and international risk sharing

Abstract

We discuss how crosscountry unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Crosscountry insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercylical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers.

Macroeconomic stabilisation properties of a euro area unemployment insurance scheme

“…Finally, EUI has been analysed in DSGE-models. In a two-country business cycle model with incomplete financial markets and frictional labour markets, Moyen et al (2019) show that optimal risk-sharing via a supranational unemployment insurance increases the countercyclicality of replacement rates compared to the decentralised setting. Simulation results based on a calibration to the euro area's core and periphery suggest significant distributional effects via the unemployment insurance system.…”

“…Our paper aims to contribute to this field. Closely related to our analysis, Moyen et al (2019) analyse an optimal unemployment insurance scheme for the EMU in a two-region DSGE-model with frictional unemployment. They show the existence of a tradeoff between cross-country risk sharing and an efficient labour market allocation due to the effect of unemployment insurance on replacement rates and households' work incentives.…”

Consumption taxation to finance pension payments

“…The job separation rate χ is set at 6% per quarter. With a vacancy filling rate of 0.7 as in Christoffel et al (2009), we set the steady-state job finding rate to pa = 0.92 and pb = 0.9 to target aggregate unemployment rates of roughly 5% and 10% in Germany and the rest of the European Union, respectively (see Moyen, Stähler, and Winkler, 2019, for a discussion). Parameter κ is set to 0.80, which implies a Frisch elasticity of around 0.6, in line with estimated values (see Den Haan and Kaltenbrunner ( 2009)).…”