Universal Basic Income Versus Unemployment Insurance

26 Pages Posted: 6 Dec 2014

See all articles by Alice Fabre

Alice Fabre

Aix-Marseille University

Stephane Pallage

University of Quebec at Montreal - Department of Economics; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Christian Zimmermann

Federal Reserve Bank of Saint Louis; IZA Institute of Labor Economics

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Abstract

In this paper we compare the welfare effects of unemployment insurance (UI) with a universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.

Keywords: universal basic income, idiosyncratic shocks, unemployment insurance, heterogeneous agents, moral hazard

JEL Classification: E24, D7, J65

Suggested Citation

Fabre, Alice and Pallage, Stephane and Zimmermann, Christian, Universal Basic Income Versus Unemployment Insurance. IZA Discussion Paper No. 8667. Available at SSRN: https://ssrn.com/abstract=2534695

Alice Fabre (Contact Author)

Aix-Marseille University ( email )

Stephane Pallage

University of Quebec at Montreal - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada
514-987-3000 ext. 8730 (Phone)
514-987-8494 (Fax)

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Christian Zimmermann

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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