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Next: Assumptions and bargaining setup Up: Regional unemployment insurance Previous: Regional unemployment insurance

Introduction

The extent to which workers are threatened by unemployment varies considerably, e.g. across industries, age, educational status, and regions. Nonetheless, it is customary to levy obligatory contributions to unemployment insurance (UI) regardless of the specific risk a worker bears of becoming unemployed. Branches of industry or regions characterised by a relatively high rate of unemployment are favoured by this practice because workers and / or employers contribute less than the actuarially fair insurance premium. This leads to a distorsion of the decisions regarding where or what kind of labour is being supplied. The purpose of this paper is to discuss the effects of placing the UI under the obligation to equilibrate its budget in each region of a federation instead of on the whole. After such a reform, regionally differenciated UI parameters reflect the risk of unemployment within each region. The results may nevertheless be applied to other characteristics, systematically influencing the probability of entering unemployment.

In some cases, one might argue, such a distorsion by a central UI can be justified, namely, if other distorsions are countervailed. For instance, risk aversion could lead to an inefficiently low number of workers choosing to supply labour in regions where employment varies relatively strongly. In this case, the implementation of a uniform UI scheme could be welfare-enhancing. The argument, though, is only valid if labour markets are in equilibrium, which is hardly an adequate assumption, in particular if UI is at the centre of the investigation.

But also the intuitive reasoning of some protagonists of a regionalisation of UI implicitely takes for granted that labour markets clear. The Kommission für Zukunftsfragen der Freistaaten Bayern und Sachsen (1997), a committee prominenty advocating regionalisation of UI in Germany, argues that it would encourage workers to migrate into those regions where labour is relatively scarce, thereby improving the allocation of labour in the federal state. However, in the presence of involuntary unemployment1 in both origin and destination region, there would not be any efficiency gain from such reallocation of unemployment.

Concerning the distributional effects of the reform, it seems to be straightforward that economic agents from rich regions2 would profit to the disadvantage of agents from poor regions. Contributions differ only with reference to the assessment of this circumstance. From a politico-economic point of view, von Hagen and Hammond (1998, p. 334f.) argue in a related context that an insurance systematically favouring one group over another is likely to loose the acceptance of those who are paying net transfers on average over time. The increase of the so-called ficticiously self-employed in Germany over the last years indeed seems to underline this argument in favour of a regionalisation. Other authors align their arguments to the ideal of homogenous net incomes and reject regionalising the budget of UI because of a presumed increase of income differentials.

However, the effects which actually arise from binding UI to equilibrate budgets regionally are not as clear as it seems if the analysis allows for migration in a system of regions with unvoluntary unemployment occuring within each region, and wages being determined endogenously. In such a framework, the reform produces an increase of migration from the poor to the rich regions because either UI taxes increase or benefits decrease to couterbalance the loss of transfer income in the poor region and vice versa. How the regional unemployment rates differ in equilibrium is yet not clear because it depends on how wages are influenced by the changes in benefits, contributions and migration. Consequently, it may well be that workers and / or employers in the poor region benefit from the measure. This study´s aim is to shed some light on the complex effects of reforming UI along this line. The focus is on the conditions under which workers and employers from both regions prefer one or the other institutional arrangement.

In the analytical framework, wages are determined in bargains between unions and firms on the firm level, leaving employment as a sole reponsability of the firms (right-to-manage-approach, see Nickell and Andrews (1983), and, for adaptions of the model with UI, e.g. Pissarides (1998), and Holmlund (1998)). In the following section, after introducing the main assumptions, the bargaining setup is discussed. Sections 3 and 4 respectively compare a model with central UI to a model with regional UI, for the cases when contributions or benefits are adjusted to maintain equilibrated UI budget(s). In section 5, a calibration allows to compare the outcomes of the models. Special interest lies in the comparative advantage the agents have if UI is regionalised. Section 6 contains some concluding remarks.


next up previous
Next: Assumptions and bargaining setup Up: Regional unemployment insurance Previous: Regional unemployment insurance
Helge Sanner: Regional Unemployment Insurance, Potsdam 2001