Do it yourself European Unemployment Insurance 2016

In their Policy Brief prepared for the September 13 informal meeting of EU finance ministers (ECOFIN), Claeys, Darvas and Wolff (2014) discuss the benefits, drawbacks and possible designs for a potential European Unemployment Insurance (EUI) scheme. They end their discussion by formulating 10 key decisions that policy makers would have to take before implementing such a scheme. To illustrate this Policy Brief, this blog post proposes to give the reader the opportunity to make the main decisions on the design of an EUI scheme. Given that one of the main purposes of an EUI scheme would be to act as a stabilization mechanism by providing resources to the countries with increasing unemployment rates, these simulations allow you to see what would have been the potential outcomes of such a scheme if it had existed since 2000 depending on the various design parameters. The decisions to take concerning the parameters are the following - At what level should the scheme be implemented - at the European Union (EU) or at Euro Area (EA) level? Should it be an ‘all-time” basic unemployment insurance (that would replace partly or fully national schemes) or a ‘catastrophic’ one (which would only be activated when there is a significant increase in the unemployment rate in a country)? In the case of a catastrophic insurance, what should be the trigger to activate it? Should the scheme try to be neutral over the cycle for each country (thanks to differentiated contribution rates across countries) or should it allow potential persistent transfers (with a single rate across the EU/EA)? What should be the replacement rate (i.e the share of the previous wage received as unemployment benefit)? In order to simplify the choices for the non-expert reader, another possibility offered by our simulation tool is to run simulations by choosing directly the objectives you want the scheme to achieve rather than the exact parameters - Again, you will have to choose at what level the scheme should be implemented - European Union or Euro Area? What should be the degree of stabilization achieved by the scheme? Do you want it to deal with all shocks, just large shocks, or only very large shocks? What should be the degree of solidarity achieved by the scheme? Do you want a scheme that minimizes lasting transfers across countries or not? For the interested readers, the methodology used for the simulations can be found at the end of this post. Select Parameters or Objectives of the scheme Parameters Objectives Area Euro Area European Union Contribution rate Single Differentiated Type of insurance Basic Catastrophic Replacement rate 50% 60% 70% 80% Trigger for catastrophic 0.5ppts 1.0ppts 1.5ppts What shocks should the scheme absorb All Very large Large Minimise permanent transfers Yes No Select regions for graph Select year to display on map // // How to read the table, map and graph? The table, graph and map display net payments (as a percentage of GDP) that would have been received by the countries from an EUI scheme since 2000. Positive numbers, in green, represent net payments to the countries, whereas negative numbers, in red, represent net contributions to the EUI scheme. The last 4 rows of the table indicate annual and cumulative cash positions of the scheme for each year (in % of GDP and in € billions). Positive numbers, in green, represent positive cash positions of the scheme that could be saved for the future, whereas negative numbers, in red, represent negative cash positions that would have to be financed by borrowing in the capital markets. Try out some combinations and either chose which countries you want to be displayed on the chart or move the slider of the map through the years to visualize more clearly which member states receive what in each year. Remember green is equal to receiving payments from the scheme, while red means that the country is making net payments into the scheme. The most interesting combinations To help you get a flavour for what is possible to achieve with an EUI scheme depending on its design, let’s discuss three combinations that we think are interesting - The basic scheme In this variant, the insurance scheme provides benefits to all unemployed of the Euro area and is financed with a single contribution rate paid by all workers of the Eurozone, regardless of the previous use of the scheme and the current economic situation of their countries. The replacement of previous wages is limited to 50% (but countries with higher replacement rate can top that up with their own national schemes). Basically this variant of the scheme would replace partly the national unemployment schemes and net payments received by country would be directly proportionate to the number of unemployed. As the result, this scheme provides permanent transfers from countries with low unemployment rate to those with high ones - Austria, the Netherlands and Luxembourg would have made net payments into the scheme for the whole of 2000-2013 while Finland, Greece and Spain would have been net receivers throughout the same period.