Skip to main content
Log in

A positive theory of the earnings relationship of unemployment benefits

  • Published:
Public Choice Aims and scope Submit manuscript

Abstract

In a wage bargaining model, a stronger earnings relationship of unemployment benefits may reduce wages. Therefore, the benefit structure significantly influences profits and trade union utility, raising the question as to how the benefit structure is determined in the political process. We consider a government that chooses the earnings relationship in order to maximize its political support. Our model predicts a strong earnings relationship under right-wing governments and a weak relationship when unions are influential. Using panel data for 19 OECD countries, we find support for these theoretical predictions. Moreover, we show that the earnings relationship varies negatively with openness.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

References

  • Agell, J. (2002). On the determinants of labour market institutions: rent-seeking vs. social insurance. German Economic Review, 2(2), 107–135.

    Article  Google Scholar 

  • Anesi, V., & De Donder, P. (2009). A positive theory of unemployment insurance and employment protection. CEPR discussion paper No. 7333.

  • Armingeon, K., Gerber, M., Leimgruber, P., & Beyeler, M. (2008). Comparative political data set 1960–2006. Institute of Political Science, University of Bern.

  • Atkinson, A. B. (1990). Income maintenance for the unemployed in Britain and the response to high unemployment. Ethics, 100(3), 569–585.

    Article  Google Scholar 

  • Atkinson, A. B., & Micklewright, J. (1989). Turning the screw: benefits for the unemployed 1979–88. In A. Dilnot & I. Walker (Eds.), The economics of social security (pp. 17–51). Oxford: Oxford University Press.

    Google Scholar 

  • Baltagi, B. H. (2005). Econometric analysis of panel data. New York: Wiley.

    Google Scholar 

  • Beck, N. (2007). From statistical nuisances to serious modeling: changing how we think about the analysis of time-series–cross-section data. Political Analysis, 15(2), 97–100.

    Article  Google Scholar 

  • Beissinger, T., & Egger, H. (2004). Dynamic wage bargaining if benefits are tied to individual wages. Oxford Economic Papers, 56(3), 437–460.

    Article  Google Scholar 

  • Blanchard, O., & Tirole, J. (2008). The joint design of unemployment insurance and employment protection: a first pass. Journal of the European Economic Association, 6(1), 45–77.

    Article  Google Scholar 

  • Boeri, T., Conde-Ruiz, J., & Galasso, V. (2003). Protecting against labour market risk: employment protection or unemployment benefits. IZA discussion paper No. 834.

  • Boeri, T., Conde-Ruiz, J., & Galasso, V. (2004). Cross-skill redistribution and the trade-off between unemployment benefits and employment protection. IZA discussion paper No. 1371.

  • Boeri, T., Conde-Ruiz, J., & Galasso, V. (2006), The political economy of flexicurity. FEDEA discussion paper 2006-15.

  • Booth, A. L. (1995). The economics of the trade union. Cambridge: Cambridge University Press.

    Google Scholar 

  • Botero, J., Djankov, S., La Porta, R., Lopez-de-Silanes, & Shleifer, A. (2004). The regulation of labor. The Quarterly Journal of Economics, 119(4), 1339–1382.

    Article  Google Scholar 

  • Boulhol, H. (2009). Do capital market and trade liberalization trigger labor market deregulation? Journal of International Economics, 77(2), 223–233.

    Article  Google Scholar 

  • Cusack, T. R. (1999). Some political data for 20 OECD countries. Berlin: WZB.

    Google Scholar 

  • Disney, R. (2004). Are contributions to public pensions programmes a tax on employment? Economic Policy, 39, 267–311.

    Article  Google Scholar 

  • Di Tella, R., & MacCulloch, R. (2002). The determination of unemployment benefits. Journal of Labor Economics, 20(2), 404–434.

    Article  Google Scholar 

  • Du Caju, P., Gautier, E., Momferatou, D., & Ward-Warmedinger, M. (2008). Institutional features of wage bargaining in 23 European countries, the US and Japan. IZA discussion paper No. 3867.

  • Dur, R. (2001). Wage-setting institutions, unemployment, and voters’ demand for redistribution policy. Scottish Journal of Political Economy, 48(5), 517–531.

    Article  Google Scholar 

  • Eichhorst, W., Grienberger-Zingerle, M., & Konle-Seidl, R. (2006). Activation policies in Germany: from status protection to basic income support. IZA discussion paper No. 2514.

  • European Commission (2008). Industrial relations in Europe 2008, Brussels.

  • Gaston, N., & Nelson, D. (2004). Structural change and the labor-market effects of globalization. Review of International Economics, 12(5), 769–792.

    Article  Google Scholar 

  • Gaston, N., & Rajaguru, G. (2008). The rise (and fall) of labour market programmes: domestic vs. global factors. Oxford Economic Papers, 60(4), 619–648.

    Article  Google Scholar 

  • Goerke, L. (2001). Bismarck versus Beveridge. Finanzarchiv, 57(3), 243–260.

    Article  Google Scholar 

  • Goerke, L., & Madsen, J. B. (2003). Earnings-related unemployment benefits and unemployment. Economic Systems, 27(1), 41–62.

    Article  Google Scholar 

  • Golden, M., & Wallerstein, M. (2004). Union centralization among advanced industrial societies: update to 1995/2000, Version 3.1, 7/28/2004.

  • Hassler, J.M., Rodríguez, J. V., Kietil, S., & Zilibotti, F. (2005). A positive theory of geographic mobility and social insurance. International Economic Review, 46(1), 263–303.

    Article  Google Scholar 

  • Heer, B. (2006). Should unemployment benefits be related to previous earnings? Finanzarchiv, 62(4), 530–550.

    Article  Google Scholar 

  • Heer, B., & Morgenstern, A. (2005). The labor market effects of indexing unemployment benefits to previous earnings. Public Finance Review, 33(3), 385–402.

    Article  Google Scholar 

  • Howell, D. R., & Rehm, M. (2009). Unemployment compensation and high European unemployment: a reassessment with new benefit indicators. Oxford Review of Economic Policy, 25(1), 60–93.

    Article  Google Scholar 

  • Lingens, J., & Wälde, K. (2009). Pareto-improving unemployment policies. FinanzArchiv/Public Finance Analysis, 65(2), 220–245.

    Article  Google Scholar 

  • Martin, J. P. (1996). Measures of replacement rates for the purpose of international comparisons: a note. OECD Economic Studies, 26, 99–115.

    Google Scholar 

  • Neugart, M. (2005). Unemployment insurance: the role of electoral systems and regional labor markets. European Journal of Political Economy, 21(4), 815–829.

    Article  Google Scholar 

  • Neugart, M. (2008). The choice of insurance in the labor market. Public Choice, 134(3–4), 445–462.

    Article  Google Scholar 

  • Nickell, S. J., & Nunziata, L. (2001). Labour market institutions database (LMIDB), Version 2.0.

  • OECD (2004). Wage setting institutions and outcomes. In Employment outlook (pp. 127–181). Paris.

  • OECD (2007). Benefits and wages 2007—OECD indicators. Paris.

  • Oswald, A. J. (1982). The microeconomic theory of trade unions. The Economic Journal, 92(367), 576–595.

    Article  Google Scholar 

  • Oswald, A. J. (1993). Efficient contracts are on the labour demand curve: theory and evidence. Labour Economics, 1(1), 85–113.

    Article  Google Scholar 

  • Pallage, S., & Zimmermann, C. (2001). Voting on unemployment insurance. International Economic Review, 42(4), 903–923.

    Article  Google Scholar 

  • Pencavel, J. H. (1991). Labor markets under trade unionism. Oxford: Blackwell.

    Google Scholar 

  • Plümper, T., & Troeger, V. E. (2007). Efficient estimation of time-invariant and rarely changing variables in finite sample panel analyses with unit fixed effects. Political Analysis, 15(2), 124–139.

    Article  Google Scholar 

  • Potrafke, N. (2009). Labor market deregulation and globalization: empirical evidence from OECD countries. Review of World Economics (forthcoming).

  • Rothschild, K. W. (1986). ‘Left’ and ‘Right’ in ‘Federal Europe’. Kyklos, 39, 359–376.

    Article  Google Scholar 

  • Saint-Paul, G. (1996). Exploring the political economy of labour market institutions. Economic Policy, 11, 265–315.

    Article  Google Scholar 

  • Uusitalo, R., & Verho, J. (2007). The effects of unemployment benefits on re-employment rates: evidence from the Finnish UI-benefit reform. IFAU working paper 21.

  • Vaubel, R. (2008). The political economy of labor market regulation by the European union. Review of International Organizations, 3(4), 435–465.

    Article  Google Scholar 

  • Vijlbrief, H., & van de Wijngaert, R. (1995). Unemployment insurance policy and union wage formation. Labour, 9(2), 233–251.

    Article  Google Scholar 

  • Visser, J. (2009). The ICTWSS database, Amsterdam. http://www.uva-aias.net/207.

  • Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge: MIT Press.

    Google Scholar 

  • Wright, R. (1986). The redistributive roles of unemployment insurance and the dynamics of voting. Journal of Public Economics, 31(3), 377–399.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Laszlo Goerke.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Goerke, L., Pannenberg, M. & Ursprung, H.W. A positive theory of the earnings relationship of unemployment benefits. Public Choice 145, 137–163 (2010). https://doi.org/10.1007/s11127-009-9558-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-009-9558-0

JEL Classification

Navigation