Incentive and Insurance Effects of Tax Financed Unemployment Insurance

36 Pages Posted: 22 Nov 2010

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: September 2010

Abstract

The potential distortions of job-search incentives caused by unemployment benefits and their financing are well known. However, a benefit-tax scheme also provides insurance having direct utility effects as well as indirect effects on risk taking. The latter mitigates or may even dominate standard incentive effects to produce a non-monotone relation between efficiency (incentives) and equity (insurance). This implies that an increase in both benefits and the tax rate up to some point may increase average income and reduce inequality, i.e., there is not necessarily a trade-off between considerations for efficiency and equity. However, optimal utilitarian policies always position the economy at a point where marginal policy changes involve a trade-off, otherwise policies would not be optimal.

Keywords: incentives, risk sharing, Search, unemployment benefits

JEL Classification: D80, J20, J65

Suggested Citation

Andersen, Torben M., Incentive and Insurance Effects of Tax Financed Unemployment Insurance (September 2010). CEPR Discussion Paper No. DP8025, Available at SSRN: https://ssrn.com/abstract=1711018

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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