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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 unemployment insurance programs in a state union. A centralized insurance pools the cost of unemployment which implies a collective bargaining in the countries that leads to excessively high wages and inefficient insurance. Those high wages attract workers who reduce the outsourced economic cost of unemployment. Only with perfect mobility, this opposing migration effect completely outweighs the pooling effect, and the insurance is no longer inefficient when centralized. Furthermore, we conclude that a principle of efficient federal systems might be that fiscally linked economic policies and institutions should be governed on the same federative level.

Suggested Citation

  • Fenge, Robert & Friese, Max, 2021. "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, revised 2021.
    • Handle: RePEc:zbw:roswps:162
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    References listed on IDEAS

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    1. Robert Fenge & Max Friese, 2022. "Should unemployment insurance be centralized in a state union? Unearthing a principle of efficient federation building," Scandinavian Journal of Economics, Wiley Blackwell, vol. 124(2), pages 363-395, April.

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    More about this item

    Keywords

    unemployment insurance; imperfect labor markets; federal state union; centralization; migration; vertical fiscal externality;
    All these keywords.

    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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