Incentive and Insurance Effects of Tax Financed Unemployment Insurance
Torben M. Andersen
University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
CEPR Discussion Paper No. DP8025
The potential distortions of job-search incentives caused by unemployment benefits and their financing are well known. However, a benefit-tax scheme also provides insurance having direct utility effects as well as indirect effects on risk taking. The latter mitigates or may even dominate standard incentive effects to produce a non-monotone relation between efficiency (incentives) and equity (insurance). This implies that an increase in both benefits and the tax rate up to some point may increase average income and reduce inequality, i.e., there is not necessarily a trade-off between considerations for efficiency and equity. However, optimal utilitarian policies always position the economy at a point where marginal policy changes involve a trade-off, otherwise policies would not be optimal.
Number of Pages in PDF File: 36
Keywords: incentives, risk sharing, Search, unemployment benefits
JEL Classification: D80, J20, J65working papers series
Date posted: November 22, 2010
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