In this paper, we incorporate a positive theory of unemployment insurance
into a dynamic overlapping generations model with search-matching frictions
and on-the-job learning-by-doing. The model shows that societies populated
by identical rational agents, but differing in the initial distribution
of human capital across agents, may choose very different unemployment
insurance levels in a politico-economic equilibrium. The interaction
between the political decision about the level of the unemployment ...
In this paper, we incorporate a positive theory of unemployment insurance
into a dynamic overlapping generations model with search-matching frictions
and on-the-job learning-by-doing. The model shows that societies populated
by identical rational agents, but differing in the initial distribution
of human capital across agents, may choose very different unemployment
insurance levels in a politico-economic equilibrium. The interaction
between the political decision about the level of the unemployment insurance
and the optimal search behavior of the unemployed gives rise to a
self-reinforcing mechanism whichmay generate multiple steady-state
equilibria. In particular, a European-type steady-state with high
unemployment, low employment turnover and high insurance can co-exist with
an American-type steady-state with low unemployment, high employment turnover
and low unemployment insurance. A calibrated version of the model features
two distinct steady-state equilibria with unemployment levels and duration
rates resembling those of the U.S. and Europe, respectively.
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