Thünen-Series of Applied Economic Theory - Working Paper No. 162
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.
unemployment insurance imperfect labor markets federal state union centralization migration vertical fiscal externality