Unemployment insurance in unionized labor markets with mobile workers: neither Ghent nor centralized

Abstract

This paper analyzes unemployment insurance (UI) schemes in the presence of mobile workers and trade unions at industry or country level that are capable of internalizing the effect of wage demands on UI contribution rates. We compare two types of existing UI systems. When UI is organized at trade union level (decentralized Ghent UI), trade unions strategically lower the benefit levels of their UI schemes to deter welfare recipients from other unions from entering their UI scheme, leading to a race to the bottom in UI provision. With centralized provision of UI, by contrast, trade unions do not fully account for the cost of higher wages as mobility allows them to partially shift the burden of unemployment to other UIs. A system of coordinated UI, combining a centrally set benefit level with decentralized funding as in Ghent UI systems, can circumvent both the strategic benefit setting and the fiscal externality problems, thus reconciling the equity and efficiency aims in the design of unemployment insurance.

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Notes

  1. 1.

    Rather than focusing on some optimal unemployment insurance schemes (e.g. Landais et al. 2010) we focus on how different types of unemployment insurance schemes affect the ability of trade unions to externalize the social cost of higher wages. This requires a framework in which wage negotiations are explicitly modelled. As a stylized fact, note that within the EU, 60% of employees’ wages are determined by collective bargaining (Fulton 2015).

  2. 2.

    Note that the institutional structure of collective bargaining is in general very difficult to change and only very few systems of collective bargaining centralized at national level exist. In 2000, out of 20 OECD countries, only in Ireland and the Netherlands centralized or nationally coordinated collective bargaining was practiced (Nickell 2006). Centralized bargaining, although recommended by the aforementioned theoretical literature, is difficult in practice, as such systems suffer from inflexibility and enforcement problems (Katz 1993; Freeman and Gibbons 1995).

  3. 3.

    In Belgium, trade unions administer the funds of the unemployment insurance, but eligibility to benefits does not depend on union membership (Böckerman and Uusitalo 2006). With regard to the arguments in this paper, the Belgian UI functions exactly as any other Ghent system.

  4. 4.

    Sinn (2000) suggests that, whilst retaining mobility of individuals among states, a “home country principle” of taxation where an individual will always pay taxes in and receive benefits from his/her home country, which effectively curtails mobility between redistributive systems.

  5. 5.

    Allowing for sector-specific trade unions within countries would not affect the qualitative results of our analysis. In this case, the degree to which a trade union internalizes the social cost of higher sector-specific wage setting would decline when a EU-wide unemployment scheme would be implemented.

  6. 6.

    Since we exclusively focus on effects that do not affect firms’ profits, the monopoly trade union model in which trade unions unilaterally set wages leads to the same qualitative results as models applying Nash-bargaining between trade unions and firms (see Holmlund et al. 1989).

  7. 7.

    We assume throughout our analysis that labor demand in each industry is independent of the wages set in all other industries. This simplification is justified since we concentrate on the effects of different UI systems on labor market outcomes, for which possible cross-wage effects are not relevant. Such effects are of importance when the issue of union centralization or coordination is under investigation (see e.g. Calmfors and Driffill (1988).

  8. 8.

    We use the model of a “utilitarian” trade union (cf. Oswald 1985), as it combines intuitive clarity of the objective function (maximization of the sum of members’ utility) with analytical tractability and is the most widespread model of trade union behavior in the literature.

  9. 9.

    Note that all results would hold if the tax rate was kept constant and the benefit levels were adjusted accordingly.

  10. 10.

    As we are mainly interested in the interpretation of UI centralization in an international context, we assume full union membership, corresponding to taking part in a national UI system in a multi-country setting. Furthermore, the rationale governing the unions’ choices would be unaffected by relaxing the membership assumption as long as the probability to be employed or unemployed is the same for union members and non-members in any one industry and all workers (employed or unemployed) take part in the UI scheme.

  11. 11.

    We understand the “race to the bottom” to imply a reduction of UI levels, not necessarily a complete withdrawal of UI.

  12. 12.

    \(\underset{\raise0.3em\hbox{$\smash{\scriptscriptstyle-}$}}{b}\) is restricted to non-negative values. Should, for certain parameter constellations, the ratio of marginal utilities in condition (16) be so low to require negative values of \(\underset{\raise0.3em\hbox{$\smash{\scriptscriptstyle-}$}}{b}\), \(\underset{\raise0.3em\hbox{$\smash{\scriptscriptstyle-}$}}{b} = 0\) applies.

  13. 13.

    See “Appendix” section.

  14. 14.

    For very high values of N, the denominator of (15) will turn negative and full insurance is no longer possible. Numerical simulations with realistic parameter settings have shown that this occurs only at extremely large values of N (around 1.000.000).

  15. 15.

    The effect would remain the same even if the UI system is run by an actor separate from the trade union (e.g. a government), as long as the actor aims to maximise the utility for the same group of individuals.

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Acknowledgements

We would like to thank Thomas Aronsson, Friedrich Heinemann and Marcel Thum and an anonymous referee for valuable comments and suggestions. The usual disclaimer applies.

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Correspondence to Ronnie Schöb.

Appendix

Appendix

Under Centralized UI, full unemployment insurance cannot be provided at the labor-rents maximizing wage.

Proof

Full unemployment insurance for all unions requires a symmetric equilibrium in wages, since only one benefit level and one tax rate exist in centralized UI. At the benefit level bga, any symmetric equilibrium in wages in a centralized UI system implies wages strictly larger than \(w^{ga}\): A symmetric equilibrium in wages at \(w^{ga}\) exists if the first order condition of the unions’ wage setting problem in a centralized UI system (16) under benefit bga is satisfied at \(w_{i} = w^{ga} \forall i\). If (13) is not satisfied and the expression on the LHS takes a positive sign at \(w^{ga} ,\) unions will set higher wages than \(w^{ga}\)

$$\left. \begin{aligned}\Omega _{{w_{j} }} & = \eta \left[ {u\left( {\left( {1 - t\left( {w_{j} ,w_{ - j} , b} \right)} \right) w_{j} } \right) - u\left( {b + \tilde{b}} \right)} \right] \\ & \quad + w_{j} u^{{\prime }} \left( {\left( {1 - t\left( {w_{j} ,w_{ - j} , b} \right)} \right) w_{j} } \right) \\ & \quad \times \left[ {1 - t\left( {w_{j} ,w_{ - j} , b} \right) - w_{j} \frac{{\delta t\left( {w_{j} ,w_{ - j} , b} \right)}}{{\delta w_{j} }}} \right] \\ \end{aligned} \right|_{{ b = b^{ga} ; w_{i} = w^{ga} \forall i}} .$$
(23)

Under b = bga and \(w_{i} = w^{ga} \forall i\), we know from Sect. 3 that the condition for full insurance (5) holds. Thus, the first expression in square brackets is equal to zero. Also, \(w_{j} u^{\prime}\left( {\left( {1 - t} \right)w_{j} } \right) > 0\) around \(w^{ga}\). The sign of the entire expression is thus determined by

$$\left[ {1 - t\left( {w_{j} ,w_{ - j} , b^{ga} } \right) - w\frac{{\delta t\left( {w_{j} ,w_{ - j} , b^{ga} } \right)}}{{\delta w_{j} }}} \right],$$
(24)

which must equal zero in the case of N = 1 due to the equivalence of this case with the no-mobility Ghent union case, where wga satisfies the first-order condition (6).

As we know that \({{\delta t\left( {w_{j} ,w_{ - j} , b^{ga} } \right)} \mathord{\left/ {\vphantom {{\delta t\left( {w_{j} ,w_{ - j} , b^{ga} } \right)} {\delta w_{j} }}} \right. \kern-0pt} {\delta w_{j} }} > 0\) is strictly smaller in the case of N > 1 than if N = 1, the sign of (24) at \(w_{i} = w^{*} \forall i\) must be positive for N > 1, implying (23) to be positive. Finally, note that, as the tax rate effect is diminished compared to the case of N = 1 by the factor \(\frac{{}}{{}}{{w_{j} L_{j} \left( {w_{j} } \right)} \mathord{\left/ {\vphantom {{w_{j} L_{j} \left( {w_{j} } \right)} {\mathop \sum \nolimits_{i = 1}^{N} \left( {w_{i} L_{i} \left( {w_{i} } \right)} \right)}}} \right. \kern-0pt} {\mathop \sum \nolimits_{i = 1}^{N} \left( {w_{i} L_{i} \left( {w_{i} } \right)} \right)}}\), this effect increases as all wages rise, since \({{\delta \left( {w_{i} L_{i} \left( {w_{i} } \right)} \right)} \mathord{\left/ {\vphantom {{\delta \left( {w_{i} L_{i} \left( {w_{i} } \right)} \right)} {\delta w_{i} }}} \right. \kern-0pt} {\delta w_{i} }} < 0 \forall i\), implying that a symmetric equilibrium in wages at benefit level bga exists for some \(w_{i} > w^{ga} \forall i\), However, the budget constraint (3c) and the full insurance condition (5) imply that under centralized UI, bga is the unique benefit level providing full insurance in a symmetric wage equilibrium at the labor-rents maximizing wage, \(w_{i} = w^{ga} \forall i\), so at the equilibrium \(w_{i} > w^{ga} \forall i\) at bga, there will be neither full insurance nor fulfillment of the budget constraint.\(\square\)

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Saha, D., Schöb, R. Unemployment insurance in unionized labor markets with mobile workers: neither Ghent nor centralized. Empirica 46, 305–326 (2019). https://doi.org/10.1007/s10663-017-9398-y

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Keywords

  • Unemployment insurance
  • Ghent system
  • Trade unions