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Conclusion

The aim of this contribution is to shed some light on the effects of putting a self-financing UI under the obligation to have balanced budgets in every region. A broad analytical framework is established to examine the impact on wages, employment, and on UI parameters, which, for their part, determine the agentsī preferences towards a regional or a central UI. This framework allows for numerous extensions and reinterpretations. For instance, one could speak of two levels of qualification, instead of regions. Then, the parameter $k$ would represent the costs of a higher qualification. Another example of a reinterpretation would be to consider the question of a centralisation of national social security systems on a supra-national level, as von Hagen and Hammond (1998) do for the case of the European Union. A possible extension would be to derive endogenously the extent and the foundation of UI by maximising a welfare function to be defined, or to model a bargain between workers and firms over UI parameters, as in Hamermesh and Scoones (1999).

The intuition is that the regionalisation would enhance efficiency and improve the economic situation of agents from the low-unemployment region to the disadvantage of agents from the high-unemployment region. Although the effects are complex and cannot be derived unambiguously, a numerical example shows that the intuition is not true in general. Migration connects the expected utilities of workers from both regions through constant migration costs. Hence, the preferences of workers are marching in step. The higher volume of migration in the case of regional UI budgets leads to a loss of efficiency. A conflict only arises between firms from the rich and from the poor region. Under the restriction to self-financing UI, the regionalisation leads, depending on the assumed regime, either to lower UI taxes or to higher UI benefits in the rich region. Because both parameters have a positive impact on wages under reasonable assumptions, equilibrium wages in the rich region fall in the former case, and rise in the latter. This causes firms to prefer regional UI budgets if the tax rate is endogenous, and to prefer central UI if the benefit rate is endogenous. The inverse is valid for firms from the poor region.

Even though these results hinge partially on assumed functions and parameters, the underlying effects are plausible. Other effects, neglected in these models, may alter our results. Nonetheless, the mere possibility of these results shows that sweeping and intuitive judgements are not appropriate when dealing with this complex subject.


next up previous
Next: Bibliography Up: Regional unemployment insurance Previous: Models BC and BR
Helge Sanner: Regional Unemployment Insurance, Potsdam 2001