Financing Unemployment Benefits in the Business Cycle: Stabilization, Welfare and Equity Issues

Abstract

We study in an stochastic intertemporal general equilibrium the implications on stabilization and welfare indicators of alternative financing schemes of unemployment benefits. The question we ask is whether or not an unemployment benefits institution can insure workers against macroeconomic risk within the business cycle.

In the model, imperfect competition on the good market and monopoly unions at the firm level are responsible for unemployment. The budgetary constraint of the unemployment benefits institution can be fulfilled with respect to four different scenarii: unemployment benefits, social contribution rate on workers (employed or not), social contribution rate on firms or debt may adjust in the business cycle. For each of these scenarii, we compute the unconditional distribution of workers wealth in the economy, where workers differ with respect to their probability of becoming employed. This individual probability is assumed to be smaller if the worker was unemployed the period before. We can compute the consequences on all the welfare distribution moments of the alternative financing scenarii.