A Feasible Unemployment-Based Shock Absorber for the Euro Area

39 Pages Posted: 5 Apr 2015

Date Written: November 20, 2014

Abstract

This paper contributes to the debate on the design of a centralised fiscal tool absorbing country-specific negative shocks in the euro area. Based on theoretical insights, it identifies the broad characteristics that a shock absorber based on unemployment should have in order to be incentive-compatible and politically feasible. It then derives empirically the combination of activation thresholds, experience rating, eligibility criteria, and benefit generosity which define the systems offering the highest stabilisation for given levels of redistribution, accounting for the large variation in benefit take-up rates across European countries. The analysis suggests that the shock absorber should: i) give rise to macro cross-national transfers, mimicking those that would be generated by a notional euro-wide unemployment benefit scheme of minimal coverage and generosity; ii) be activated by a trigger; and iii) feature partial experience rating. The simulation results, confirmed by robustness checks, show that even systems that do not redistribute resources between countries can have a considerable stabilisation impact in the medium run. Low benefit take-up in Southern Europe substantially reduces the stabilisation properties and the size of the scheme.

Keywords: unemployment benefits, absorption of macroeconomic shocks, fiscal union

JEL Classification: E6, J65, H53

Suggested Citation

Brandolini, Andrea and Carta, Francesca and D’Amuri, Francesco, A Feasible Unemployment-Based Shock Absorber for the Euro Area (November 20, 2014). Bank of Italy Occasional Paper No. 254, Available at SSRN: https://ssrn.com/abstract=2589570 or http://dx.doi.org/10.2139/ssrn.2589570

Andrea Brandolini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Roma, Rome 00184
Italy
+390647923568 (Phone)
+390647923720 (Fax)

Francesca Carta

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco D’Amuri

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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