An Unemployment Insurance Scheme for the Euro Area? A Comparison of Different Alternatives Using Micro Data

Transcription

1 EM 15/15 An Unepoyent Insurance Schee for the Euro Area? A Coparison of Different Aternatives Using Micro Data Mathias Dos, Ceens Fuest, Dirk Neuann and Andreas Peich Deceber 215

2 An Unepoyent Insurance Schee for the Euro Area? Coparison of Different Aternatives Using Micro Data 1 Mathias Dos a Ceens Fuest a Dirk Neuann b Andreas Peich a a ZEW Mannhei b CORE, Cathoic University of Louvain Abstract We anayze different options for the design of a coon unepoyent insurance syste for the euro area (EA). We assess their effectiveness to act as an insurance device in the presence of asyetric acroeconoic shocks. Running counterfactua siuations based on icro data for the period 2-1, we quantify the trade-off between autoatic stabiization effects and the degree of cross-country transfers. In the baseine, we focus on a non-contingent schee covering short-ter unepoyent and find that it woud have absorbed a significant fraction of the unepoyent shock in the recent crisis. However, four eber states of the EA18 woud have been either a peranent net contributor or net recipient. Our resuts suggest that contingent benefits coud iit the degree of cross-country redistribution, but ight reduce desired insurance effects. We aso study heterogeneous effects within countries and discuss ora hazard issues at the eve of individuas, the adinistration and econoic poicy. JEL: F55, H2, J65 Keywords: European fisca integration, unepoyent insurance, autoatic stabiizers Corresponding author: Mathias Dos Eai: [email protected] 1 This paper uses EUROMOD version F6.+. EUROMOD is aintained, deveoped and anaged by the Institute for Socia and Econoic Research (ISER) at the University of Essex, in coaboration with nationa teas fro the EU eber states. We are indebted to the any peope who have contributed to the deveopent of EUROMOD. The process of extending and updating EUROMOD is financiay supported by the Directorate Genera for Epoyent, Socia Affairs and Incusion of the European Coission [Progress grant no. VS/211/445.]. We woud ike to thank Abert Soé-Oé, two anonyous referees, Oivier Bontout, Georg Fischer, Pierre Picard, as we as seinar and conference audiences in Berin (CIBU), Bratisava (CBR), Brusses (DG ECFIN, DG EMPL), Canazei (IT9), Freiburg, Hae (IWH), Haburg (VfS), Louvain-a-Neuve, Lugano (IIPF), Luxebourg, Mannhei (EEA, MATAX, SEEK), Paris (Eurofrae, OECD), Sazburg, Santa Fe (NTA), Trier, Tübingen, Venice (CESifo SI) and Vienna (OeNB) for vauabe coents and suggestions. Kara Schade and Nis Wehrhöfer provided exceent research assistance. Neuann acknowedges support fro the European Research Counci under the European Union.s Seventh Fraework Prograe (FP7/27-21) / ERC grant agreeent no A resuts and their interpretation presented in this paper are the authors responsibiity.

3 1 Introduction The Great Recession and the resuting European debt crisis have revived the debate about deeper sca integration in the European Econoic and Monetary Union (EMU). The EMU is an atypica onetary union because onetary poicy is decided at the centra (European) eve whie sca poicy is carried out at the sub-centra (eber-state) eve (Bordo et a. 21). 1 Soe observers argue that nationa autoatic stabiizers provided insu cient incoe insurance during the crisis as soe EMU eber states ost access to private capita arkets and concude that coon sca stabiization echaniss are necessary to ake EMU ore sustainabe and ore resiient against asyetric acroeconoic shocks (Bertoa 21, IMF 21). The ain concerns in this debate reate to the issues of peranent transfer ows within the currency union and ora hazard. In particuar, nationa governents ight negect structura refors or sca consoidation. How coud a sca risk sharing echanis in the euro area be designed? In the so-caed Four Presidents Report pubished in 212, the forer President of the European Counci, Heran van Ropuy, has suggested the foowing: An EMU sca capacity with a iited asyetric shock absorption function coud take the for of an insurance-type syste between euro area countries. [...] The speci c design of such a function coud foow two broad approaches. The rst woud be a acroeconoic approach, where contributions and disburseents woud be based on uctuations in cycica revenue and expenditure ites [...]. The second coud be based on a icroeconoic approach, and be ore directy inked to a speci c pubic function sensitive to the econoic cyce, such as unepoyent insurance. (Van Ropuy 212). The European Coission and ore recenty Jean-Caude Juncker in the Five Presidents report buit upon this initiative with own bueprints for the EMU (European Coission 212, Juncker 215). Since then, the perspectives of a European sca union and di erent refor proposas aong the ines of the Four Presidents report have been anayzed in various studies. 2 For the acroeconoic approach, suggestions incude a cycica shock absorber based on output gaps (Enderein et a. 21) and a stabiization fund for the 1 In the foowing we equivaenty use EA, EMU and Eurozone to refer to the 18 eber states of the European Currency Union that had introduced the euro in First anayses of potentia insurance e ects if the EMU were ore scay integrated date back to the introduction of the euro (Fatás 1998 and Forni and Reichin 1999), adding to the vast iterature on insurance e ects in existing sca federations such as the US (see e.g. Bayoui and Masson 1995 and Asdrubai et a. 1996). More recent contributions incude Bargain et a. (21) who anayze the econoic ipications of a fuy integrated European tax and transfer syste and a sca equaization echanis based on taxing capacity and expenditure needs for 11 founding ebers of the euro area, and Feyrer and Sacerdote (21) who ask to what extent econoic shocks woud be absorbed by the center if the EU were as scay integrated as the US. The question of how to optiay design insurance echaniss and the poitica econoy of sca unions has aso gained renewed interest in the ore theoretica iterature (cf. Evers 212, Farhi and Werning 214, Luque et a. 214). 1

4 euro area (Furceri and Zdzienicka 215). For the icroeconoic approach, the discussion has focused on the idea of a coon EMU-wide unepoyent insurance syste (henceforth EMU-UI) as proposed aong others by Deinzer (24), Duien (214a) and Andor (214). Previous studies on the econoic e ects of an EMU-UI syste are based on aggregate acro-eve data and focus on overa net contributions across euro area eber states. This is the rst paper that provides a coprehensive and systeatic anaysis of a wide range of design options for an EMU-UI syste based on househod icro data. 4 Our counterfactua experient covers the period since the start of the euro in 1999 unti 21. The anaysis incudes the current 18 eber states (EA 18) and siuates a sape of repeated cross-sections for each eber state cobining icro data fro the EU Statistics on Incoe and Living Conditions (EU-SILC) and the EU Labor Force Survey (EU-LFS). We focus on redistributive and stabiizing e ects of a basic EMU- UI schee that party repaces nationa UI systes. We quantify the coverage and stabiization gaps. These are de ned as the di erences in coverage and stabiization between i) the benchark scenario of nationa UI aone and ii) a refor scenario where EMU-UI and nationa UI coexist as expained further beow. Coverage and stabiization gaps are cacuated at the aggregate househod eve as we as for di erent sociodeographic groups within each country. Autoatic sca stabiization e ects are decoposed into househod incoe and governent budget stabiization. In addition, we expore the e ects of experience rating and copare the basic EMU-UI schee to a variant with contingent, i.e., trigger-based bene t payents that provide incoe insurance ony if the abor arket situation deteriorates signi canty in a given eber state. Moreover, we run severa sensitivity checks regarding coverage and generosity eves of the schee. We aso discuss various concerns and potentia adverse e ects of an EMU-UI syste, in particuar the view that such a syste woud ead to a transfer union in Europe and ora hazard issues. Iportanty, the ai of the paper is not to serve as a poicy proposa but rather as a conceptua experient, providing genera insights into the e ects of various design options for a basic EMU-UI. Our ain resuts are as foows. We nd that a basic EMU-UI schee with a repaceent rate of 5 per cent, a axiu duration of bene t receipt of 12 onths and a broad coverage of a new unepoyed with previous epoyent incoe coud be ipeented with a reativey sa annua budget. Over the period 2-1, average See aso IAB (21), Centre for European Poicy Studies (214), Duien et a. (214) and Leouch and Sode (214). Caeys et a. (214) provide an overview of poicy chaenges associated with an EMU-UI syste. 4 Brandoini et a. (214) and Jara and Sutherand (214) aso use icro data to anayze an EMU-UI syste. The focus of their anayses di ers fro ours as in contrast to this study, the forer considers a notiona EMU-UI syste backing nationa UI systes and thus disregards EMU-UI transfers at the icro eve, whie the atter assues EMU-UI bene ts to top up nationa bene ts if iniu requireents are not et by nationa UI systes. In addition, these papers cover shorter tie periods and fewer countries than our paper. 2

5 bene ts woud have aounted to roughy 47 biion euro per year, nanced by a unifor contribution rate across eber states of 1.56 per cent on epoyent incoe. The schee is not designed to give rise to peranent redistribution across countries because ony short-ter (rather than structura) unepoyent is insured. Nevertheess our siuations revea that a sa nuber of eber states woud have been net contributors or net recipients in each year of our siuation period. Largest net contributors are Austria, Gerany and the Netherands with average yeary net contributions of per cent of GDP. Latvia and Spain are the argest net recipients (average yeary net bene ts of.6 and.54 per cent of GDP). We show that a basic EMU-UI schee can provide insurance by stabiizing househod incoes and governent budgets. We copare autoatic stabiization e ects under dua insurance (the cobination of nationa UI and EMU-UI) and the status quo. For 29, the year with the ost signi cant surge in unepoyent across EA eber states, we nd that the average (unweighted) stabiization gap, that is the potentia gain in stabiization through an EMU-UI for househod incoes, woud have aounted to 12 per cent of the gross incoe shock at the EA-eve. Largest gaps are found for Southern European countries (e.g. 18 per cent in Itay, 17 per cent in Greece) and the Batics (22 per cent in Latvia). Governent budgets woud have been stabiized by on average 6 per cent of the gross incoe shock in 29. This is because governents woud have spent ess on nationa UI. The cobined stabiization ipact on househod incoes and governent budgets woud have equaed. per cent of GDP on average, with vaues up to 1.1 (.9) per cent in Latvia (Estonia). Schees with ower coverage ratios and generosity eves generate saer cross-country transfers but aso reduce desired insurance e ects. Turning next to within-country heterogeneity, we nd the argest coverage and stabiization gains for the young and, perhaps surprisingy, aso for high-skied unepoyed. The reason for the forer is that the young often do not eet eigibiity conditions of nationa UI whie they are covered by the siuated EMU-UI. The resut for the high-skied is due to a higher proportion of short-ter reative to ong-ter unepoyed (who are not eigibe to EMU-UI) aong the. Finay, we consider a contingent bene t schee which is activated if the unepoyent rate in a given eber state is 1 percentage point higher than in one of the previous three years. Under this syste no eber state woud have been in a peranent net contributing/receiving position. With 22 biion euro per year, the overa budget and thus the aount of cross-country redistribution woud have been ess than haf as arge as under the non-contingent schee in the baseine. The paper is structured as foows. In section 2, we discuss di erent aternatives how a coon EMU-UI syste coud be designed. In addition, we present key features of the siuated EMU-UI schees. Section describes the fraework of the

6 anaysis. Baseine resuts are presented in section 4. Aternative EMU-UI schees with experience rating and contingent bene ts are anayzed in section 5. Section 6 concudes. 2 Possibe characteristics of an EMU-UI syste Design options. A coon unepoyent insurance syste for the euro area coud be designed in various ways. Three key options have been discussed in the iterature and in the poicy debate so far. A rst option woud be a coon EMU-UI syste that provides a basic eve of insurance by party repacing nationa unepoyent insurance systes. Bene ts fro the euro area syste coud be topped up by additiona payents fro nationa unepoyent insurance systes. Hence, there woud be roo for diversity across eber states so that existing di erences with regard to repaceent rates and bene t duration coud be preserved. The EMU-UI syste woud be nanced by socia insurance contributions with a contribution rate that coud be unifor across Eurozone eber states or country-speci c and tie-variant to restrict cross-country transfers. 5 An iportant feature of such a schee is that it woud provide incoe insurance to the unepoyed (under certain eigibiity conditions) irrespective of the size of the unepoyent shock in a given eber state. As an aternative, a coon schee coud provide incoe stabiization ony in the event of arge (unepoyent) shocks. Such contingent unepoyent bene ts woud be triggered if the eve and/or change in overa unepoyent has reached a pre-deterined threshod in a given period. 6 Nationa unepoyent insurance systes woud sti be in pace in nora ties. As a third option, the euro area unepoyent insurance schee coud copeent nationa systes by providing additiona transfers which woud either top up nationa bene ts or kick in if nationa bene ts expire. The payout rues of this schee coud be trigger-based as we. Such a syste woud be coparabe to the US unepoyent insurance syste where reguar state bene ts can be copeented by two types of bene ts extension progras which are at east party provided by the federa governent, the Extended Bene t progra (EB) and eergency bene ts. 7 Concerns. A ajor concern with an EMU-UI syste is that it woud ead to peranent transfers across euro area eber states. How do the three variants for an EMU-UI syste di er with regard to the risk of peranent redistribution? 5 Cf. Dos et a. (214) and Duien (214b). 6 Cf. Gros (214). Other triggers coud be the short-ter unepoyent rate or the insured unepoyent rate which is used in the US unepoyent insurance syste (besides the tota unepoyent rate) as a trigger for bene t extension progras (Nichoson et a. 214). 7 Cf. Congressiona Budget O ce (212) and Nichoson et a. (214). Note that in the US reguar state bene ts are paid for a period which usuay asts not onger than 6 onths. The arge extensions of unepoyent insurance provided by the US federa governent in the period increased the bene t duration to 99 weeks in any US states. Unepoyent bene ts in the EMU are usuay granted uch onger than reguar state bene ts in the US (Esser et a. 21). A 4

7 basic EMU-UI schee woud not be designed to generate peranent redistribution because such a schee conditions on changes in epoyent status rather than on unepoyent eves. Di erences in unepoyent rates aone do not (necessariy) ead to peranent redistribution because bene ts woud be targeted to cycica (shorttie) unepoyent and woud expire after a certain tie span. It ay nevertheess happen that (net) transfers are uneveny distributed across eber states if ows into unepoyent diverge peranenty or if there are peranent di erences in the eve of short-ter unepoyent. 8 This risk coud be reduced by caw-back echaniss based on experience rating or if transfers were trigger-based as under the contingent bene t schee. Ceary, redistributive e ects of the forer (atter) schee woud depend on the exact caw-back echanis (choice of the trigger). The risk of peranent transfers woud be high with an EMU-UI schee that provides extended bene ts after nationa unepoyent bene ts expire because such a schee woud be ikey to cover not ony cycica, but aso structura unepoyent. Moreover, it coud incentivize governents to cut nationa unepoyent insurance bene ts as the EMU-UI syste woud step in. A further concern reated to ora hazard is that a coon EMU-UI syste coud underine incentives for nationa governents to address structura weaknesses of the abor arket. One arguent against this cai is that nationa governents woud sti bear the cost of ong-ter unepoyent under a basic, contingent or non-contingent EMU-UI syste. This arguent is uch weaker, however, with an extended bene t progra which is ikey to cover aso structura unepoyent. Moreover, incentives to pursue active abor arket poicies such as short-tie work coud be adversey a ected by an EMU-UI syste given that the cost of short-ter unepoyent woud be borne by the coon poo. Additiona concerns reate to other ora hazard issues incuding adinistrative anipuation and adverse incentive e ects at the individua eve with regard to job search and abor suppy. Nationa adinistrations woud have incentives to use their discretion to increase the nuber of bene t recipients. Incentives to anipuate woud depend on the characteristics of the syste, e.g. or a waiting period for EMU-UI bene ts. the required epoyent period The onger both periods are, the ore costy woud adinistrative anipuation be, but onger periods woud aso reduce desired insurance e ects. Distortions at the individua eve depend on the overa bene t eve (EMU pus nationa bene ts) and duration reative to the status quo. The e ect of a coon EMU-UI syste on igration responses in case of unepoyent is abiguous. The portabiity of unepoyent bene t cais ight increase the wiingness to igrate and to search for a job in a eber state with better abor arket conditions, but coud potentiay aso reduce incentives for active job search if 8 Econoies where seasona epoyent ike in touris pays an iportant roe woud be ikey to have arger ows into and out of unepoyent. 5

8 EMU-UI bene s are ore generous than nationa bene ts. Key features of the siuated EMU-UI schees. The current debate focuses on a basic EMU-UI syste (contingent and non-contingent) as the risk of peranent transfers and ora hazard issues are perceived to be ess severe copared to an extended bene t syste. In the baseine scenario, we therefore focus on a basic, noncontingent EMU-UI schee with a repaceent rate of 5 per cent of previous gross earnings and a broad coverage of the short-ter unepoyed. 9 Eigibe to EMU-UI bene ts are a newy unepoyed with previous epoyent incoe for a period of up to 12 onths (upper bound estiate in ters of coverage). The schee is nanced by socia insurance contributions with a unifor contribution rate across eber states and caibrated to be revenue-neutra at the Eurozone-eve (but not the eber-state eve) over the siuation period. This schee is abeed as variant A henceforth. In addition, we expore how our resuts change if we vary soe key paraeters of the baseine schee in ters of coverage rates and generosity eves. We introduce a waiting period of 2 onths after job oss before eigibiity to EMU-UI bene ts begins in order to diinish the e ect of seasona unepoyent and iit the axiu bene t to 5 per cent of edian incoe (variant B). Variant C has a repaceent rate of 5 per cent of gross incoe which is on average equivaent to a repaceent rate of 5 per cent of net incoe. Bene ts are capped at 5 per cent of edian incoe, but there is no waiting period. Variant D cobines variants B and C (axiu bene t aount of 5 per cent of edian incoe, 5 per cent repaceent rate, waiting period). Variant E is based on variant D, but ony those short-ter unepoyed that receive nationa UI bene ts are eigibe to EMU-UI bene ts (ower bound estiate in ters of coverage). Additionay, we copare the baseine EMU-UI schee (variant A) to two aternative scenarios in which we ipose revenue-neutraity at the eber-state eve (experience rating) and ake the basic EMU-UI schee trigger-based (contingent bene ts). The anaysis of redistributive and stabiizing properties of these additiona scenarios is an iportant extension to the previous iterature because they are often assued to aeviate the risk of peranent redistribution and ora hazard issues. Data and ethodoogy Di erent ethodoogica approaches for an anaysis of the econoic e ects of an EMU- UI syste are possibe. Whie previous research has ainy used aggregate acro eve 9 This is on average equivaent to a repaceent rate of 71 per cent of net incoe. To be precise, it corresponds to a repaceent rate of 71.4 per cent appied to 7 per cent of gross incoe, i.e., taking into account the average share of incoe taxes and socia insurance contributions in the euro area. A key advantage of appying the repaceent rate to gross rather than net earnings is that in the forer case the generosity of the schee is not a ected by the size (and progressivity) of nationa net taxes (incoe taxes, socia insurance contributions and cash bene ts) which vary consideraby across euro area eber states. 6

9 data, we rey on representative househod icro data for the EA18 using EUROMOD, a static tax-bene t cacuator for the European Union countries. EUROMOD is ainy based on cross-sectiona icro data fro the EU Statistics on Incoe and Living Conditions (EU-SILC) reeased by Eurostat (Eurostat 212) which we cobine with icro data fro the EU Labor Force Survey (EU-LFS). 1 The key advantage of our approach in the present context is that we expoit both detaied incoe distribution inforation contained in EUROMOD as we as inforation on changing abor arket patterns over tie contained in the LFS. We are thus abe to account for heterogeneity in various characteristics of the popuations in di erent countries which acro data approaches cannot capture. In our siuation experient, we introduce an unepoyent insurance schee for the EA18 eber states and ask what woud have happened if such a schee had been introduced fro the start of the euro in As there are neither pane data nor repeated cross-sectiona data avaiabe containing both incoe distributions and abor arket conditions for a EA eber states over this period, we construct a series of reweighted cross-sections for the period of anaysis which exacty repicates changes in abor arket conditions (unepoyent rate, share of short- and ong-ter unepoyed, size and coposition of the abor force) and average earnings over tie. 11 Our baseine input data is fro EU-SILC 28, the ost recent data avaiabe with the version of EUROMOD used, incuding the EA18 eber states. For each country, these data are rst reweighted to re ect abor arket conditions as observed in 1999 and then reweighted subsequenty for each year of the anaysis. Fro the LFS, we ipute changes in (un)epoyent rates, size of the abor force, shares of short- and ong-ter unepoyent, and coverage rates of nationa UI systes for 18 gender-age-education strata (ae/feae, three age groups, three education eves) on an annua basis. We siuate (un)epoyent changes over tie for each of the 18 socio-deographic subgroups so that our series of reweighted cross-sections precisey atches these diensions both at the subgroup and aggregate eve. Earnings growth is iputed fro the AMECO-database in order to account for changes in the tax base of the EMU-UI and nationa UI systes. These iputations ensure that our reweighted icro data are consistent with aggregate statistics in each year of our siuation period (see Technica Appendix A.2 for further inforation). The anaysis at the subgroup eve aows us to exaine individua heterogeneity within each eber 1 Sutherand and Figari (21) provide ore detaied inforation on EUROMOD, the underying input data and vaidation. The EU-LFS, conducted by the nationa statistica institutes across Europe and processed by Eurostat, is a representative househod survey covering the years fro 198 onwards. It is the ost iportant source for abor arket statistics in the EU. Cf. for further inforation. 11 See Ivervo et a. (26), Bargain et a. (212) and Dos et a. (212) for further appications of the reweighting approach. Siiar iputations fro the LFS to EUROMOD input data have been conducted by Navicke et a. (214) and Sagado et a. (214). 7

10 state showing which groups in the popuation woud bene t/ose fro the introduction of an EMU-UI syste (section 4.4). In addition, we construct a nationa UI cacuator that incorporates a iportant poicy rues of nationa UI systes over the period 2-1 and siuate nationa unepoyent bene ts in addition to EMU-UI bene ts in case of dua insurance and in the benchark scenario. 12 Our anaysis is based on the foowing sipifying assuptions. First, we do not take into account genera equiibriu e ects of an EMU-UI syste, i.e., our anaysis reains in a partia equiibriu context. This ipies that we abstract both fro potentia ora hazard of nationa governents and adinistrations which coud have adverse abor arket e ects as we as fro potentia growth-enhancing e ects of an EMU-UI schee. Accounting for these acroeconoic feedback e ects woud require to ink our icro data to a acro-econoetric siuation ode (Peich 29). Second, we do not siuate individua behaviora responses, e.g. potentia igration responses, changes in hours worked or di erent patterns of entries and exits to the abor force which coud foow the introduction of an EMU-UI. 1 In the ight of these assuptions, our resuts shoud be interpreted as rst-round e ects of an EMU-UI syste. A further assuption reates to the interaction between EMU-UI and nationa UI systes given that a basic EMU-UI syste anayzed in this paper woud party repace nationa UI systes. As eaborated in section 4., we assue that nationa UI systes woud top up the EMU-UI schee if nationa UI systes are ore generous in their coverage or repaceent rate so that no unepoyed woud be worse o after the introduction of an EMU-UI syste. Finay, we run our siuations as if the EA18 had existed fro 1999 onwards as it woud copicate the interpretation of our resuts if we incuded new eber states ony after adoption of the euro. 4 Main resuts 4.1 Coverage rates Figure 1 provides descriptive statistics on unepoyent and (counterfactua) coverage rates of EMU-UI and nationa UI for EA eber states over the period 2-1. It shows that signi cant di erences in unepoyent (bue ine) exist across countries both in eves and trends which can be exepi ed by a coparison of Gerany on the one hand and Greece, Ireand and Spain on the other hand. In Gerany, the unepoy- 12 Detaied poicy rues of nationa UI systes are coected fro country chapters of the OECD series "Bene ts and Wages" ( tsand-wages.ht) and fro the EU s MISSOC-Coparative Tabes Database ( Actua coverage rates are iputed fro the EU-LFS. 1 Bargain et a. (21) account for abor suppy behavior after the introduction of a European tax and transfer syste. They nd that abor suppy responses are argina and do not ater their ain resuts. 8

11 ent rate increased fro 21 onwards, peaked at 11.2 per cent in 25 being the second highest rate in the EA in that year, but constanty fe afterwards. In contrast, unepoyent rates increased treendousy in Greece, Ireand and Spain fro 28/29 onwards, up to 14.7 per cent in Ireand in 211/212 and 26.1 (27.5) per cent in Spain (Greece) in 21. Other eber states such as Cyprus, Estonia, Itay and Portuga were aso hit by arge unepoyent shocks during the crisis. Figure 1 indicates that the share of unepoyed reative to the tota abor force receiving EMU-UI bene ts (variant A, green ine) foows cosey trends in overa unepoyent. However, coverage rates of EMU-UI easured as the share of unepoyed receiving EMU-UI bene ts reative to a unepoyed (orange ine) diverge fro unepoyent rates in ties of rising or faing unepoyent as can be seen, for instance, for Gerany in the eary 2s or for Greece, Ireand and Spain during the recent crisis period. The reason is that the share of ong-ter unepoyed usuay goes up (down) in proonged recessions (upswings) and that EMU-UI bene ts are ony paid to short-ter unepoyed. Figure 1 shows further that coverage rates of EMU-UI di er substantiay across EA countries ranging fro an average of 4 per cent in Sovakia to 79 per cent in Finand (EMU-UI variant A) which is due to di erences in the share of short-ter unepoyent. In the foowing sections, we show that EMU-UI schees with a waiting period of 2 onths (variants B, D and E) woud reduce redistributive and insurance e ects reative to the baseine variant as seasona unepoyent (ike in touris) woud to soe extent be excuded fro coverage. Finay, Figure 1 points to a signi cant coverage gap between our siuated EMU-UI schee and nationa UI reveaed by a coparison of the orange and red ines. Coverage of nationa UI is particuary ow in soe Southern and Eastern European eber states such as Greece, Itay, Latvia, Mata or Sovakia, a with average coverage rates of the short-ter unepoyed over the period 2-1 beow 15 per cent. 9

12 in % of abor force in % of unep. in % of abor force in % of unep. in % of abor force in % of unep in % of abor force in % of unep. in % of abor force in % of unep. in % of abor force in % of unep in % of abor force in % of unep. in % of abor force in % of unep. in % of unep in % of abor force in % of unep. in % of abor force in % of unep. in % of abor force in % of unep in % of unep. in % of abor force in % of unep. in % of abor force in % of unep in % of abor force in % of unep. in % of abor force in % of unep. in % of unep. Figure 1: Unepoyent and coverage rates of EMU-UI and nationa UI AT BE in % of abor force CY in % of abor force15 6 EE FI FR GE GR IE IT LU in % of abor force18 LV MT NL PT SI SK SP Unep. Rate Coverage EMU UI Share EMU UI recipients Coverage Nationa UI Note: Unepoyent rate and share EM U -UI recipients easured in per cent of the abor force. Coverage EM U -UI and nationa UI cacuated as nuber of short-ter unepoyed receiving UI bene ts reative to tota nuber of unepoyed. Coverage nationa UI incudes UI bene ts and assistance. If coverage inforation is issing in the LFS for a given country in one year, it is iputed fro the cosest country-year ce avaiabe. Sources: LFS and own cacuations based on EUROM OD. 1

13 in biion euros 4.2 Budgetary e ects and nancia ows Based on siuated EMU-UI bene ts and the overa tax base, we cacuate the contribution rate that woud have ed to revenue-neutraity at the EA-eve over the period 2-1. For the baseine schee (variant A), the contribution rate aounts to 1.56 per cent on epoyent incoe. 14 Next, we siuate contribution payents to EMU-UI under the assuption that the schee can run de cits and surpuses in singe years. Figure 2 shows the evoution of contributions and bene ts for the EA18. Whie contributions woud have aost constanty grown over the period due to growth in noina earnings, bene t payents woud have uctuated to a uch arger extent. On average, bene ts and contributions aount to roughy 47 biion euro per year. The schee woud have run surpuses fro 2- and fro 25-8 and de cits in the reaining years, in particuar during the recent nancia and econoic crisis. Figure 2: Overa contributions and bene ts at Eurozone-eve, EA18 SIC BEN Note: Socia insurance contributions (SIC) and bene ts (BEN) at Eurozone-eve in noina ters. Contribution rate unifor across eber states. Schee is revenue-neutra over the siuation period. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. Figure shows average yeary net contributions as we as iniu and axiu payents for the baseine scenario. Reative to GDP, Austria, Gerany and the 14 Socia insurance contributions incude epoyer and epoyee contributions. If sef-epoyed were excuded fro the schee, the revenue-neutra contribution rate woud be 1.7 per cent. 11

14 Netherands woud have been the argest net contributors with average net contributions of.19 per cent in Gerany,.24 per cent in Austria and.9 per cent in the Netherands. Latvia (-.6 per cent) and Spain (-.54 per cent) woud have been the argest net recipients. Interestingy, the ajority of eber states woud have been net contributors in soe years and net recipients in other years. Notabe exceptions are Austria, Luxebourg and the Netherands (Spain). These countries woud have been in a peranent net contributor (recipient) position. Figure : Average yeary net contributions, AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP Net contributor Net recipient Min / Max Note: Net contributions (SIC - BEN) for baseine schee (variant A). Contribution rate unifor across eber states. Schee is revenue-neutra over the siuation period. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. Finay, we copare the baseine EMU-UI schee (variant A) to variants with ower coverage and generosity eves (variants B-E). Resuts are presented in Figure 4 and in Tabe in the Appendix. Figure 4 shows average yeary net contributions under variants A (bue bars), B (green bars, axiu bene t aount capped at 5 per cent of a country s edian incoe and no bene ts paid within the rst two onths of the unepoyent spe) and D (red bars, based on variant B, but with a gross repaceent rate of 5 per cent instead of 5 per cent). Tabe shows the fu set of resuts. Average net contributions under variants B-E are usuay saer than in the baseine. France becoes a peranent net recipient under variants B-D, abeit with 12

15 average net contributions beow -.1 per cent of GDP. In Estonia and Portuga, the average net position changes fro recipient to contributor which is due to ow edian incoes in these eber states. Figure 4: Average yeary net contributions - Other EMU-UI variants AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP Baseine Cap, waiting per., 5% rep. rate Cap, waiting per. Min/Max Note: Net contributions (SIC - BEN) for variants A (Baseine), B (Cap, waiting period) and D (Cap, waiting period, 5% repaceent rate). Contribution rate unifor across eber states. Schees are revenue-neutra over the siuation period. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. 4. Autoatic sca stabiization Autoatic sca stabiization is associated with the abiity of taxes and transfers to autoaticay stabiize disposabe incoe and consequenty consuption in the event of acroeconoic shocks. This reies on a sipe echanis: in the presence of a given negative shock to gross incoe, taxes decine and transfers increase, with the decine in disposabe incoe being saer than the shock to gross incoe (Auerbach and Feenberg 2, Kniesner and Ziiak 22, Dos et a. 212). Severa coponents of governent budgets are a ected by the acroeconoic situation in ways that operate to sooth the business cyce, with progressive incoe taxes and unepoyent bene ts being the ost proinent exapes Autoatic stabiization ight not ony have e ects on disposabe incoe and consuption but aso on GDP itsef (cf. Fatás and Mihov 21). If fewer taxes are coected and ore transfers are 1

16 There are two channes through which an EMU-UI syste that party repaces nationa UI systes can achieve additiona autoatic stabiization e ects: First, it can stabiize househod incoes if the EMU-UI syste had higher repaceent rates or a broader coverage than nationa UI systes. 16 Second, it can stabiize governent budgets as governents coud (party) cut back nationa UI bene ts. In order to copare stabiization e ects in case of dua insurance of nationa UI and EMU-UI with the benchark of nationa UI aone, we have to ake an assuption how nationa UI systes woud be adjusted after the introduction of an EMU-UI syste. In our siuations, we assue that nationa UI bene ts top up EMU-UI bene ts if the forer are ore generous than the atter and are fuy cut back otherwise. If, for exape, the repaceent rate of nationa UI is 6 per cent of gross incoe and the repaceent rate of EMU-UI 5 per cent, we assue that the repaceent rate of EMU- UI is topped up by 1 percentage points such that the overa repaceent rate is sti 6 per cent. If nationa unepoyent bene ts are ess generous than EMU-UI bene ts, we assue that no nationa UI bene ts are paid out. In order to propery account for these poicy adjustents, we epoy a nationa UI cacuator as described in section and siuate nationa unepoyent bene ts in addition to EMU-UI bene ts in case of dua insurance and in the benchark scenario. We foow Auerbach and Feenberg (2) and Dos et a. (212) and estiate autoatic stabiization e ects by cacuating stabiization coe cients for househod incoes, hh, and governent budgets, gov, that show to what extent (un)epoyent shocks are absorbed by changes in unepoyent bene ts and socia insurance contributions. is coputed using arithetic changes () in bene t and contribution payents as we as changes in epoyent incoe in a given year t ( P i B i; P i SIC i and P EMP L i Yi ) which are aggregated across individuas i in each eber state (subscript t suppressed for sipicity). Note that changes in epoyent incoe as we as in contribution and bene t payents are cacuated for epoyent changes aong the extensive argin ony in order to isoate the stabiizing e ect in the event of (un)epoyent shocks fro (intensive argin) incoe changes. The househod incoe stabiization coe cient for nationa UI and EMU-UI reads: hh = P i B i j P i P i SIC i : (1) j Y EMP L i In fact, UI has a cushioning e ect both in boos and recessions as bene t and contribution payents react countercycicay to changes in epoyent. In our siuations, we want to separate the cushioning e ects in upswings and downturns. Therefore, we paid in a recession, this shoud support private incoes and dapen adverse oveents in aggregate deand. 16 Precisey speaking, a broader coverage woud ead to ore stabiization if EMU-UI bene ts were higher than eans-tested transfers such as socia assistance that those unepoyed not eigibe to UI bene ts woud receive. 14

17 divide changes in bene ts and contributions fro t to t + 1 by the absoute vaue of the aggregate gross incoe change so that hh is positive (negative) when unepoyent rises (decines): hh is coputed both for the benchark of nationa UI aone and for the scenario of dua insurance so that the gain in stabiization can be expressed as foows: dua hh ins: NAT hh = (P i Bdua ins: i ins: Pi SICdua i ) j P i Y EMP L i Stabiization of governent budgets is easured accordingy: Pi BNAT i j Pi SICNAT i : (2) gov = (P i BNAT i Pi SICNAT i ) ( P ins: i BNAT;dua i j P EMP L i Yi j ins: Pi SICNAT;dua i ) gov shows to what extent governent budgets are stabiized in the event of unepoyent shocks due to the fact that nationa UI bene t and contribution payents have to increase ess in case of dua insurance reative to the benchark ( gov > ). Conversey, when unepoyent goes down, unepoyent bene t and contribution payents decine ess in case of dua insurance than in the status quo ( gov < ). Note, however, that governent budgets woud not be a ected by rising (decining) UI bene t payents if UI contribution rates coud be raised (reduced) in a revenue-neutra way ( gov = ). As for EMU-UI, we cacuate changes in contribution payents for nationa UI based on contribution rates that baance budgets over the whoe siuation period. Our easure for governent budget stabiization is thus based on the assuption that governents woud not ater UI contribution rates instantaneousy when nationa UI disburseents change. Note further that our estiate for gov is a ower bound estiate as nationa governents woud not need to pay any onger socia assistance to those short-ter unepoyed covered by EMU-UI, but not by nationa UI. For the sae reason, our estiates for the gain in househod incoe stabiization represent an upper bound estiate. Figure 5 presents househod incoe stabiization coe cients for the so-caed GI- IPS countries (Greece, Ireand, Itay, Portuga and Spain) for the recent crisis period. The bue, green and red bars show stabiization e ects under dua insurance for three variants of EMU-UI (A, B and D), whie the orange bars depict incoe stabiization in the benchark scenario of nationa UI. 17 Our resuts suggest that reative to the benchark, EMU-UI (variant A) woud have provided signi cant additiona incoe stabiization in 29 when the crisis hit. We nd stabiization gaps aounting to Note that we siuate nationa UI bene ts ony for the short-ter unepoyed given that receipt of EMU-UI bene ts is restricted to 12 onths. This ensures that stabiization coe cients for EMU-UI and nationa UI are coparabe. 15 : ()

18 in % of incoe shock per cent of the gross incoe shock in Greece ( hh equas 22 per cent in case of dua insurance and 5 per cent in the benchark), 16 per cent in Ireand (27 per cent vs. 11 per cent), 18 per cent in Itay (2 per cent vs. 2 per cent), 9 per cent in Portuga (2 per cent vs. 11 per cent) and 15 per cent in Spain ( per cent vs. 15 per cent). The average (unweighted) stabiization gap in the EA in 29 aounts to 12 per cent and ranges fro 2 per cent in Gerany to 22 per cent in Latvia. Variants B (axiu EMU-UI bene t 5 per cent of edian incoe and waiting period of 2 onths) and D (variant B with a repaceent rate of 5 per cent of gross incoe) coe with saer stabiization gaps which indicates that schees with ower coverage or repaceent rates are ess e ective in stabiizing disposabe incoes. These ndings point to a trade-o between the aount of redistribution (ex-post) across eber states on the one hand and the insurance and stabiization e ects on the other hand. Another iportant resut evident in Figure 5 is that stabiization e ects are weaker in the ore recent years of the crisis which is due to a growing share of non-eigibe ong-ter unepoyed in these years as docuented in section 4.1. Figure 5: Househod incoe stabiization GR IE IT PT SP Baseine Cap, waiting per., 5% rep. rate Cap, waiting per. Nationa UI Note: Househod incoe stabiization coe cient hh for variants A (baseine), B (ax. EMU-UI bene t 5% of edian incoe and waiting period) and D (B + 5% repaceent rate) under dua insurance and for nationa UI. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. Figure 6 presents stabiization coe cients for governent budgets. They are sub- 16

19 in % of incoe shock stantiay saer than househod incoe stabiization coe cients ranging fro beow 2 per cent in Itay to roughy 12 per cent in Spain in 29. The (unweighted) EA average in 29 aounts to 6 per cent. Eigibiity conditions and repaceent rates of nationa UI systes are iportant drivers of governent budget stabiization as these poicy rues deterine to what extent nationa UI systes coud be cut back in case of dua insurance. As shown in Figure 6, the e ect woud be rather sa in countries ike Itay or Greece whose UI systes have coverage rates far beow the EA average and soewhat arger in Ireand, Portuga and Spain. 18 Figure 6: Governent budget stabiization GR IE IT PT SP Baseine Cap, waiting per., 5% rep. rate B: Cap, waiting per. Note: Governent budget stabiiziation coe cient gov for variants A (baseine), B (ax. EMU-UI bene t 5% of edian incoe and waiting period) and D (B + 5% repaceent rate). Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. How arge is the cobined stabiization e ect of househod incoes and governent budgets reative to GDP? In order to estiate the additiona stabiization e ect in case of dua insurance reative to nationa UI aone, we add the stabiization gain for househods (nuerator in forua 2) to the stabiization e ect for governents (nuerator in forua ): 18 Tabe 4 in the Appendix presents stabiization coe cients for househod incoes (baseine variant A under dua insurance, benchark of nationa UI aone as we as the gap between the two) and governent budgets (baseine variant A) for a EA eber states over the period

20 tot = (P ins: i Bdua i = + (P i BNAT i UI Pi BEMU i ins: Pi SICdua i ) Pi BNAT i GDP Pi SICNAT i ) ( P ins: i BNAT;dua i GDP Pi GDP SICEMU UI i : Pi SICNAT i (4) ins: Pi SICNAT;dua i ) These estiates do not re ect potentia growth e ects of EMU-UI, but erey reate changes in bene t and contribution payents foowing entries into or exits fro unepoyent in a given year to GDP in that year. Macroeconoic stabiization effects woud depend on the sca utipier of governent spending and the argina propensity to consue of individuas bene ting fro EMU-UI. Figure 7 shows stabiization e ects for the baseine EMU-UI schee (variant A). In severa countries, argest stabiization gains woud have been achieved in the recent crisis period with cushioning e ects up to 1.1 per cent of GDP in Latvia,.9 per cent in Estonia,.75 per cent in Ireand and Spain or.5 per cent in Cyprus. Gerany and Luxebourg beong to those countries that woud have been stabiized ainy in the eary 2s and very itte afterwards due to iproving abor arket conditions in the foowing years. In these two countries as we as in Austria, governent budget stabiization woud have payed a ore iportant roe than househod incoe stabiization in soe years. Figure 7: Househod incoe and governent budget stabiization AT BE CY EE FI FR 18

21 GE GR IE IT LU LV.1 MT.15 NL. PT SI SK SP Gov. budget Househod inc. Tota Note: Governent budget and househod incoe stabiization in per cent of GDP for variant A (baseine). Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. 19

22 4.4 Within-country heterogeneity An iportant contribution of this paper is to expore the e ects of an EMU-UI schee at the icro eve. Whie the previous sections were focussing on aggregate e ects across countries, this section asks what ipact dua insurance of EMU-UI and nationa UI systes woud have on di erent individuas within each country. If EMU-UI bene ts were indeed topped up by nationa UI bene ts in case nationa UI reguations are ore generous (higher coverage or repaceent rates) and in the absence of further poicy changes, no unepoyed woud be worse o after the introduction of an EMU- UI syste. As outined above, both is assued in our siuation exercise. Whie a short-ter unepoyed receiving an unepoyent bene t that is arger than the EMU-UI bene t were not a ected, those not covered by nationa UI or with an EMU- UI bene t exceeding the nationa one woud gain fro the introduction of an EMU-UI syste. Whether the epoyed woud gain or ose cruciay depends on the di erence in contribution rates in case of dua insurance and nationa UI aone. Tabe 1 copares contribution rates for di erent variants of EMU-UI topped up by nationa UI (couns A-E) with contribution rates in the benchark scenario of nationa UI aone (coun NAT-UI). Couns A-E dispay the su of the unifor EMU-UI and the country-speci c nationa UI contribution rates necessary to top up EMU-UI if needed. Both contribution rates are cacuated such that revenue-neutraity over the whoe siuation period is ensured. Coun NAT-UI shows revenue-neutra contribution rates for nationa UI aone which are cacuated under the assuption that nationa UI bene ts were ony paid to the short-ter unepoyed to ake sure that contribution rates are indeed coparabe. Tabe 1 reveas that the additiona stabiization achieved under dua insurance coes at the cost of higher contribution rates than in the benchark case of nationa UI aone. This is ainy due to coverage gaps between EMU-UI and nationa UI (section 4.1). Ony under variant E (EMU-UI with actua coverage rate of nationa UI systes), contribution rates under dua insurance woud be ower in a few countries. Interestingy, both countries which are on average net contributors (Begiu, Gerany) as we as net recipients (France, Ireand, Spain) beong to this group. The reason is that in a scenario of EMU-UI where nationa eigibiity rues are appied, not ony the evoution of the short-ter unepoyent rate in a given country vis-à-vis the rest of the EA woud deterine whether contribution rates under dua insurance are higher or ower than in the benchark, but aso the extent to which the unepoyed are covered by nationa UI systes. Whie the epoyed woud face higher contribution rates in a variants except for variant E, an interesting question is which socio-deographic groups woud bene t ost fro dua insurance. To answer this question, we spit the abor force into 18 subgroups according to three socio-deographic characteristics, naey gender, age and education (cf. section ). The groups soey coprise individuas who are part of 2

23 Tabe 1: Contribution rates in case of dua insurance vs. benchark A B C D E NAT-UI AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP Notes: Country-speci c contribution rates (in % of epoyent incoe) in case of dua insurance (couns A-E) and in the benchark (coun NAT-UI). A: Baseine, a new unepoyed with previous epoyent incoe covered. B: Max. EMU-UI bene t 5% of edian incoe and waiting period of 2 onths. C: Max. EMU-UI bene t 5% of edian incoe and EMU-UI repaceent rate of 5%. D: Max. EMU-UI bene t 5% of edian incoe, EMU-UI rep. rate of 5%, waiting period of 2 onths. E: D + EMU-UI with actua coverage of nationa UI. NAT-UI: nationa UI aone. Sources: EU-LFS and own cacuations based on EUROMOD. 21

24 the abor force, i.e. who are either epoyed or unepoyed. Figure 11 in the Appendix shows average short- and ong-ter unepoyent rates as we as the average share of winners in each subgroup over the period 2-1. In each group, winners are those short-ter unepoyed who are better o under dua insurance copared to the benchark, either because of broader coverage or higher generosity of EMU-UI. Figure 11 reveas that the young tend to bene t ost, sipy because the short-ter unepoyent rate is highest aong the young. In a few countries, aost a short-ter unepoyed woud gain under dua insurance (Estonia, Itay, Latvia, Mata, Sovakia) indicating that EMU-UI woud not ony increase coverage, but aso provide ore generous transfers. Figure 11 further shows that the short-ter unepoyent rate decreases by ski in the ajority of countries. Figure 8 presents coverage (stabiization) gaps which are cacuated as the di erence in average coverage rates (stabiization coe cients hh ) under dua insurance (variant A) and the benchark (nationa UI aone). For the stabiization gap, we take absoute vaues of stabiization coe cients so that the cushioning e ects in boos and recessions do not cance out. In severa eber states, argest coverage and stabiization gaps are found for young unepoyed who often do not eet eigibiity conditions of nationa UI due to insu cient contribution periods. Interestingy, high-skied unepoyed tend to face arger coverage and stabiization gaps and hence woud gain ore in ters of insurance than the ow- or ediu-skied. This can be expained by a higher proportion of short-ter reative to ong-ter unepoyed aong the high-skied. In other words, ong-ter unepoyent which is not covered by EMU-UI is ore prevaent aong the ow- and ediu-skied (see Figure 11). To iustrate this nding, take France or Spain as an exape. In these countries, the share of winners is higher aong the ow-skied due to higher short-ter unepoyent rates. However, ongter unepoyent rates aso decrease by ski which expains why the high-skied woud face arger gains in stabiization copared to the ow- or ediu skied. Our resuts suggest that ess stringent eigibiity conditions coud iprove incoe insurance especiay for the young, whie ore generous UI for the short-ter unepoyed ight not be an e ective poicy to provide incoe protection for the ow-skied unepoyed. 22

25 Figure 8: Coverage and stabiization gaps across socio-deographic groups y y y y f h h f f o o f h o AT y y y y f h h f f o o f h o BE y y y y f h h f f o o f h o CY y y y y f h h f f o o f h o EE y y y y f h h f f o o f h o FI y y y y f h h f f o o f h o FR y y y y f h h f f o o f h o GE y y y y f h h f f o o f h o GR y y y y f h h f f o o f h o IE y y y y f h h f f o o f h o IT y y y y f h h f f o o f h o LU y y y y f h h f f o o f h o LV y y y y f h h f f o o f h o MT y y y y f h h f f o o f h o NL y y y y f h h f f o o f h o PT y y y y f h h f f o o f h o SI y y y y f h h f f o o f h o SK y y y y f h h f f o o f h o SP Stabiization gap Coverage gap Note: First etter: age. y = young, = idde-aged, o = od. Second etter: gender. = ae, f = feae. Third etter: ski. = ow -skied, = ediu -skid, h = high-skied. For exape, y stands for "young/ae/ow -skied". Sources: AM ECO, EU-LFS and own cacuations based on EUROM OD. 2

26 5 Aternative scenarios 5.1 Experience rating Unti now, we have anayzed an EMU-UI syste with a unifor contribution rate across eber states that is revenue-neutra at the EA-eve. The anaysis in the previous section has shown that under EMU-UI variant A, four eber states woud have been either a peranent net contributor (Austria, Luxebourg and the Netherands) or net recipient (Spain). Therefore, an interesting anaytica exercise is to cacuate countryspeci c contribution rates that baance the EMU-UI budget in each eber state. This is done for iustrative purposes to show gains and osses across countries and shoud not be interpreted as a poicy aternative as this extree for of experience rating woud underine the insurance e ects of risk-sharing. Tabe 2 presents country-speci c contribution rates for the di erent variants of EMU-UI that woud have ed to revenue-neutraity over the period 2-1. The ast row of Tabe 2 shows unifor contribution rates that baance the budget at the EA, but not the eber-state eve. Given the di erences in net contributions across eber states presented in the previous section, it is not surprising that country-speci c contribution rates di er signi canty ranging fro.75 per cent in the Netherands to.29 per cent in Spain under variant A. Less generous schees (couns B-E) require ower contribution rates for revenue-neutraity. Figure 9 presents average country-speci c contribution rates for EMU-UI that baance nationa budgets in each year as we as axiu and iniu contribution rates over the period. In Austria, Luxebourg and the Netherands, the three eber states that woud have been peranent net contributors, revenue-neutra contribution rates are aways beow the unifor (Eurozone-wide) contribution rate of 1.56 per cent (dashed horizonta ine), whie the opposite is true for Spain, the ony peranent net recipient throughout the siuation period in the baseine scenario (variant A). 5.2 Contingent transfers As a further variant, we siuate an EMU-UI schee with contingent bene ts which are activated once certain triggers are reached and anayze its stabiizing and redistributive properties, in particuar whether such a schee reduces cross-country transfers. Our choice of the trigger is guided by the US Extended Bene t (EB) progra which perits states to use either the insured or the tota unepoyent rate to quaify for extended unepoyent bene ts (Nichoson et a. 214). We choose the tota unepoyent rate as a trigger so that activation of contingent transfers is independent fro eigibiity conditions of nationa unepoyent insurance systes. Precisey, bene ts fro the EMU-UI syste are triggered if the unepoyent rate in year t is at east 1 percentage 24

27 Tabe 2: Contribution rates for EMU-UI variants A B C D E AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP EA Notes: Country-speci c contribution rates (in % of epoyent incoe) that baance the EMU-UI budget in each eber state over the period 2-1. Last row: unifor contribution rates that baance the overa EMU-UI budget at Eurozone-eve (but not in each singe eber state). A: Baseine, a new unepoyed with previous epoyent incoe covered. B: Max. EMU-UI bene t 5% of edian incoe and waiting period of 2 onths. C: Max. EMU-UI bene t 5% of edian incoe and EMU-UI repaceent rate of 5%. D: Max. EMU-UI bene t 5% of edian incoe, EMU-UI rep. rate of 5%, waiting period of 2 onths. E: D + EMU-UI with actua coverage of nationa UI. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. 25

28 in % of epoyent incoe Figure 9: Country-speci c contribution rates: Annua baanced budget AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP Average contribution rate Min./Max. Note: Dashed horizonta ine: Revenue-neutra unifor contribution rate (1.56 per cent) at EA-eve for the period 2-1. Bue bars: Average country-speci c contribution rates that baance the budget in each singe year. Back vertica ines: Maxiu/Miniu country-speci c contribution rates that baance the budget in each singe year. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. point higher than the unepoyent rate in i) year t 1, ii) years t 1 or t 2, iii) years t 1 or t 2 or t. Longer ook-back periods ensure that EMU-UI bene ts can reain activated in sustained periods of high unepoyent. 19 In a other diensions (payout rues, unifor contribution rate across eber states), the contingent bene t schees i-iii are identica to the baseine schee (variant A) which ipies that by construction eber states are net contributors in those years when contingent bene ts are not triggered. Tabe 5 in the Appendix shows that whie with a three-year ook-back period, contingent bene ts woud have been triggered in a eber states at east once, they woud not have been activated in Mata (Begiu and Mata) in any year with a twoyear (one-year) ook-back period. The divergence in unepoyent across countries since the start of the euro in 1999 becoes evident by a coparison of activation periods. Whie the short-ter unepoyed in Gerany or Luxebourg, for instance, 19 In the US the Tax Reief Act changed the ook-back period in the EB progra fro a two-year to a three-year period in the recent recession to increase its stabiization ipact (Nichoson and Needes 211). 26

29 woud have received EMU-UI bene ts ony in the period 2-5 (and in 21 in Luxebourg under variant iii), transfers woud have been activated in Greece, Ireand, Itay and Spain ony fro 28/9 onwards (with the exception of Greece under variant iii in 2). Not surprisingy, with average yeary bene t and contribution payents of 1, 19 and 22 biion euro at the Eurozone-eve, the overa budget of the contingent bene t schees i-iii woud have been signi canty ower than in our baseine scenario with non-contingent bene ts (47 biion per year). Consequenty, revenue-neutra contribution rates woud have been ess than haf as arge as in the baseine (.42,.64 and.72 rather than 1.56 per cent). Figure 1 copares cuuative net contributions under the contingent bene t schees to the baseine (variant A). A key nding is that a few eber states change their net contributing position in ters of accuuated net contributions at the end of the siuation period (France, Sovenia). Austria, Luxebourg and the Netherands, the three eber states that woud have been net contributors in each year in the baseine, are now net receivers in soe years. In the Netherands, accuuated net contributions are reduced by ore than 5 per cent by the end of the siuation period reative to the baseine. Spain, a net recipient in the baseine throughout the siuation period, is a net contributor unti 27 and a net recipient in the reaining years. These resuts show that an EMU-UI syste with contingent bene ts coud indeed provide ore targeted transfers to eber states which see their abor arket conditions signi canty deteriorating. What are the autoatic stabiization e ects of such a schee? Given that the contingent bene t schees considered here correspond to the non-contingent baseine schee in a diensions besides the activation of the schee, stabiization e ects are siiar once EMU-UI bene ts are triggered. However, it ust be taken into account that countries that have not reached the trigger (but ight we be in a recession) woud be worse o copared to the baseine EMU-UI syste as the ink between contribution and bene t payents woud be broken. Househods in these eber states woud need to nance both their nationa unepoyent insurance syste as we as the EMU-UI syste. This potentia destabiizing e ect coud be prevented by suspending contribution payents to the EMU-UI syste under certain circustances such as rising unepoyent rates. 27

30 in % o f GDP in % o f GDP in % o f GDP in % o f GDP in % o f GDP in % o f GDP Figure 1: Cuuative net contributions - Contingent bene ts AT BE CY EE FI FR GE GR IE IT LU LV MT NL PT SI SK SP Baseine Contingent i) Contingent ii) Contingent iii) Note: Baseine and contingent bene ts. Contingent schee i): Bene ts are paid if unepoyent rate in a given eber state in year t is at east 1 p ercentage p oint higher than in t-1 (one-year o ok-back p erio d). C ontingent sche e ii): 2-year o ok-back p erio d, i.e., bene ts are triggered if unepoyent rate in year t is at east 1 percentage point higher than in t-1 OR t-2. Contingent schee iii): -year ook-back period, i.e., bene ts are triggered if unepoyent rate in year t is at east 1 percentage point higher than in t-1 OR t-2 OR t-. Sources: AM ECO, EU-LFS and own cacuations based on EUROM OD. 28

31 6 Concusion The econoic crisis in the Eurozone has revived the debate on deeper sca integration and has brought this topic to the top of the European poicy agenda. A coon unepoyent insurance syste is one key refor proposa which coud serve as a sca risk sharing echanis in the EA. Supporters of this idea argue that a centraized EMU-UI syste woud dapen asyetric shocks in the Eurozone and provide incoe insurance to those househods which are ost vunerabe. It woud thus not ony iprove the econoic resiience of EMU and ake its institutiona architecture ore sustainabe, but aso strengthen the socia diension of European poicy-aking. However, ain concerns incude the risk of peranent transfer ows across eber states and ora hazard for nationa governents and adinistrations, which coud ead to adverse abor arket e ects. The ai of this paper has been to present di erent options for the design of a coon unepoyent insurance syste and to assess their redistributive and stabiizing properties. Moreover, we have discussed how di erent design options woud a ect ora hazard issues. In our epirica anaysis, we have used counterfactua siuation techniques based on haronized European icro data to exaine the econoic e ects of a hypothetica coon EMU-UI syste for the tie period 2-1. Our ain resuts can be suarized as foows. A basic schee, party repacing nationa unepoyent insurance systes, with a repaceent rate of 5 per cent, a axiu duration of bene t receipt of 12 onths and a broad coverage of a new unepoyed with previous epoyent incoe coud be ipeented with a reativey sa annua budget. On average, it woud have aounted to 47 biion euro per year at the Eurozone-eve nanced by a contribution rate of 1.56 per cent on epoyent incoe. The schee woud have provided signi cant (additiona) stabiization to househod incoes and governent budgets reative to the status quo. In 29, the average stabiization gain at EA-eve woud have aounted to 12 per cent for househods and 6 per cent for governent budgets. Stabiization e ects woud have becoe saer over the course of the crisis due to the coverage of short-ter unepoyed ony. We nd, perhaps surprisingy given that the schee does not ead to peranent redistribution per se, that 4 out of 18 eber states woud have been either net contributor or net recipient in each year of our siuation period. Running various sensitivity checks incuding di erent coverage and generosity eves as we as experience rating, we show that there is a trade-o between the degree of cross-country redistribution and desired autoatic stabiization e ects. In ters of within-country heterogeneity, we nd that in particuar young unepoyed woud bene t fro broader UI coverage whie the epoyed woud face higher socia insurance contributions. Finay, our anaysis shows that a coon EMU-UI syste with contingent bene ts woud ead to ess cross-country redistribution as it 29

32 woud provide ore targeted transfers to eber states with deteriorating abor arket conditions. However, contingent bene ts can have undesirabe side e ects such as a broken ink between contribution and bene t payents if bene ts are not activated. One shoud note that the siuations assue revenue-neutraity over the entire tie span considered (2-21), but not in each period. This raises the issue of whether the EMU-UI woud be aowed to issue debt. In our cacuations the EMU-UI woud have produced a surpus in its eary phase, so that reserves woud have been avaiabe to nance higher bene ts in the crisis. But there is, of course, a concern that poitica pressures woud buid up to et the EMU-UI accuuate ore and ore debt unti it needs to be baied out by the eber states. Ceary, whie a baanced budget in each period woud iit the abiity of the syste to act as a sca stabiizer, an e ective debt iitation woud be needed. One possibe approach woud be to start by deiberatey accuuating reserves which woud provide a bu er in the next recession. We shoud ephasize that our anaysis has a nuber of iitations which shoud be taken into account in the interpretation of the resuts. Most iportanty, it is not the objective of this paper to estabish whether or not the introduction of an EMU-UI schee is desirabe in ters of overa wefare. Our anaysis focuses on the nancia ows ipied by di erent unepoyent insurance schees and the abiity of these ows to act as an autoatic stabiizer. In so far our anaysis is purey positive, rather than norative. In addition, we take econoic behavior as given. If EMU-UI had the desired stabiizing e ects, the nancia ows in the syste woud di er fro those cacuated here; the redistributive e ects woud probaby be saer. However, if the ora hazard e ects doinated, the nancia ows fro contributors to recipients coud aso be arger. Adding behaviora e ects to the anaysis is a proising subject for future research.

33 References Andor, L. (214). Basic European Unepoyent Insurance - The best way forward in strengthening the EMU s resiience and Europe s recovery, Intereconoics Vo. 49 (4): Asdrubai, P., Sorensen, P. and Yosha, O. (1996). Channes of interstate risk-sharing: United States , Quartery Journa of Econoics 111: Auerbach, A. and Feenberg, D. (2). The signi cance of federa taxes as autoatic stabiizers, Journa of Econoic Perspectives 14: Bargain, O., Dos, M., Fuest, C., Neuann, D., Peich, A., Peste, N. and Siegoch, S. (21). Fisca Union in Europe? Redistributive and Stabiizing E ects of a European Tax Bene t Syste and Fisca Equaization Mechanis, Econoic Poicy Juy 21: Bargain, O., Ivervo, H., Peich, A. and Siegoch, S. (212). Distributiona consequences of abor-deand shocks: the recession in Gerany, Internationa Tax and Pubic Finance 19 (1): Bayoui, T. and Masson, P. (1995). Fisca ows in the United States and Canada: Lessons for onetary union in Europe, European Econoic Review 9: Bertoa, G. (21). Poicy coordination, convergence, and the rise and crisis of EMU ibaances, European Coission DG Econoic and Financia A airs: European Econoy - Econoic Papers No. 49. Bordo, M., Jonung, L. and Markiewicz, A. (21). A Fisca Union for the Euro: Soe Lessons fro History, CESifo Econoic Studies 59 (): Brandoini, A., Carta, F. and D Auri, F. (214). A feasibe unepoyent-based shock absorber for the euro area, Bank of Itay, Occasiona Papers, No Centre for European Poicy Studies (214). Siuation exercise for an Unepoyent Insurance Schee for the euro area, Cost of Non-Europe Report /214. Caeys, G., Darvas, Z. and Wo, G. (214). Bene ts and drawbacks of European unepoyent insurance, Bruege Poicy Brief 214/6. Congressiona Budget O ce (212). Unepoyent insurance in the wake of the recent recession, Pub. No Deinzer, R. (24). Konvergenz- und Stabiisierungswirkungen einer europäischen Arbeitsosenversicherung, Berin: Duncker & Hubot. 1

34 Dos, M., Fuest, C., Neuann, D., Peich, A. and Ungerer, M. (214). Cost of non- Europe of the absence of an Unepoyent Insurance Schee for the Euro Area, Report on behaf of the European Pariaent. Dos, M., Fuest, C. and Peich, A. (212). Autoatic Stabiizers and Econoic Crisis: US vs. Europe, Journa of Pubic Econoics 96: Duien, S. (214a). A European Unepoyent Bene t Schee. How to provide for ore Stabiity in the Euro Zone, Gütersoh: Bertesann-Stiftung. Duien, S. (214b). Preventing peranent transers under a European Unepoyent Insurance: Can a caw-back echanis be the answer?, Presentation at the conference Econoic shock absorbers for the Eurozone, Brusses, June 214. Duien, S., Fichtner, F., Haan, P., Jaeger, L., Jansen, M., Ochan, R. and Toasch, E. (214). Eine Arbeitsosenversicherung für den Eurorau as autoatischer Stabiisator - Grenzen und Mögichkeiten, DIW Berin: Poitikberatung kopakt 86. Enderein, H., Guttenberg, L. and Spiess, J. (21). Bueprint for a cycica shock insurance in the euro area, Project EU & Di erentiated Integration. Esser, I., Ferrarini, T., Neson, K., Pae, J. and Sjöberg, O. (21). Unepoyent bene ts in EU Meber States, report prepared for the use of the European Coission, DG Epoyent, Socia A airs and Incusion. European Coission (212). A bueprint for a deep and genuine econoic and onetary union - Launching a European Debate, Counication fro the Coission, 777 na/2. Eurostat (212). Task Working paper with the description of the Incoe and iving conditions dataset. Evers, M. (212). Federa sca transfer rues in onetary unions, European Econoic Review 56: Farhi, E. and Werning, I. (214). Fisca Unions, revised version of NBER Working Paper No. 1828, Issued in August 212. Fatás, A. (1998). Does EMU need a sca federation?, Econoic Poicy 1: Fatás, A. and Mihov, I. (21). Governent size and autoatic stabiizers: internationa and intranationa evidence, Journa of Internationa Econoics 55: 28. Feyrer, J. and Sacerdote, B. (21). How uch woud US stye sca integration bu er European unepoyent and incoe shocks, Aerican Econoic Review: Papers & Proceedings 1():

35 Forni, M. and Reichin, L. (1999). Risk and potentia insurance in Europe, European Econoic Review 4: Furceri, D. and Zdzienicka, A. (215). The Euro Area Crisis: Need for a Supranationa Fisca Risk Sharing Mechanis?, Open Econoies Review 26 (4): Gros, D. (214). A sca shock absorber for the Eurozone? Insurance with Deductibe, Intereconoics Vo. 49 (4): IAB (21). Verteiungswirkungen einer europäischen Arbeitsosenversicherung - Siuationsrechnungen, Institut für Arbeitsarkt- und Berufsforschung, Aktuee Berichte. IMF (21). Toward a Fisca Union for the Euro Area, IMF Sta Discussion Note, SDN/1/9. Ivervo, H., Levy, H., Lietz, C., Mantovani, D. and Sutherand, H. (26). The sensitivity of poverty rates to acro-eve changes in the European Union, Cabridge Journa of Econoics : Jara, H. X. and Sutherand, H. (214). The ipications of an EMU unepoyent insurance schee for supporting incoes, EUROMOD Working Paper Series EM5/14. Juncker, J.-C. (215). Copeting Europe s Econoic and Monetary Union, in cose coaboration with D. Tusk, J. Dijsseboe, M. Draghi and M. Schuz. Kniesner, T. and Ziiak, J. (22). Tax Refor and Autoatic Stabiization, Aerican Econoic Review 92(): Leouch, T. and Sode, A. (214). An unepoyent insurance schee for the euro area, Trésor-Econoics No. 12. Luque, J., Morei, M. and Tavares, J. (214). A voatiity-based theory of sca union desirabiity, Journa of Pubic Econoics 112: Navicke, J., Rastrigina, O. and Sutherand, H. (214). Nowcasting indicators of poverty risk in the European Union: A icrosiuation approach, Socia Indicators Research 119 (1): Nichoson, W. and Needes, K. (211). The EUC8 Progra in Theoretica and Historica Perspective, Matheatica Poicy Research report subitted to U.S. Departent of Labor. Nichoson, W., Needes, K. and Hock, H. (214). Unepoyent Copensation During the Great Recession: Theory and Evidence, Nationa Tax Journa 67(1):

36 Peich, A. (29). The bene ts and probes of inking icro and acro odes - Evidence fro a at tax anaysis, Journa of Appied Econoics XII (2): Sagado, M., Figari, F., Sutherand, H. and Tuino, A. (214). Wefare copensation for unepoyent in the Great Recession, Review of Incoe and Weath 6: Sutherand, H. and Figari, F. (21). EUROMOD: the European Union tax-bene t icrosiuation ode, Internationa Journa of Microsiuation 6(1): Van Ropuy, H. (212). Towards a genuine Econoic and Monetary Union, Report to the European Counci Meeting, Deceber, , 212, in cose coaboration with J.M. Barroso, J.-C. Juncker and M. Draghi. A Appendix: A.1 Additiona resuts 4

37 Tabe : Net contributions (in per cent of GDP) A B C D E A B C D E A B C D E A B C D E A B C D E AT B E C Y E E F I F R G E G R IE IT L U LV M T N L P T SI SK SP

38 A B C D E A B C D E A B C D E A B C D E A B C D E AT B E C Y E E F I F R G E G R IE IT L U LV M T N L P T SI SK SP

39 A B C D E A B C D E A B C D E A B C D E AT B E C Y E E F I F R G E G R IE IT L U LV M T N L P T SI SK SP Notes: Net contributions () for EMU-UI. A: Baseine, a new unepoyed with previous epoyent incoe covered. B: Max. EMU-UI bene t 5% of edian incoe and waiting period of 2 onths. C: Max. EMU-UI bene t 5% of edian incoe and EMU-UI repaceent rate of 5%. D: Max. EMU-UI bene t 5% of edian incoe, EMU-UI rep. rate of 5%, waiting period of 2 onths. E: D + EMU-UI with actua coverage of nationa UI. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. 7

40 Tabe 4: Stabiization coe cients D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G OV AT B E C Y E E F I F R G E G R IE IT L U LV M T N L P T SI SK SP

41 D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G O V AT B E C Y E E F I F R G E G R IE IT L U LV M T N L P T SI SK SP

42 D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G OV D I N AT G A P G OV AT B E C Y E E F I F R G E G R IE IT L U LV M T N L P T SI SK SP Notes: Stabiization coe cients for househod incoes and governent budgets. DI: hh for baseine variant A (dua insurance), NAT: hh for the benchark scenario of nationa UI aone, GAP: stabiization gap between DI and NAT, GOV: gov for baseine variant A. Sources: AMECO, EU-LFS and own cacuations based on EUROMOD. 4

43 Figure 11: Short- and ong-ter unepoyent rates and winners across groups y y y y h f h o o f h o AT y y y y h f h o o f h o BE y y y y h f h o o f h o CY y y y y h f h o o f h o EE y y y y h f h o o f h o FI 1 2 y y y y h f h o o f h o FR y y y y h f h o o f h o y y y y h f h o o f h o GE IT y y y y h f h o o f h o y y y y h f h o o f h o GR LU y y y y h f h o o f h o y y y y h f h o o f h o IE LV y y y y h f h o o f h o MT y y y y h f h o o f h o NL y y y y h f h o o f h o PT y y y y h f h o o f h o SI 5 1 y y y y h f h o o f h o SK y y y y h f h o o f h o SP Share of winners Short ter UR Long ter UR Note: First etter: age. y = young, = idde-aged, o = od. Second etter: gender. = ae, f = feae. Third etter: ski. = ow -skied, = ediu -skid, h = high-skied. For exape, y stands for "young/ae/ow -skied". Sources: AM ECO, EU-LFS and own cacuations based on EUROM OD. 41

44 Tabe 5: Trigger for contingent bene ts i ii iii i ii iii i ii iii i ii iii i ii iii i ii iii i ii iii AT BE CY EE FI FR 1 GE GR 1 IE IT LU LV MT 1 NL PT SI SK SP i ii iii i ii iii i ii iii i ii iii i ii iii i ii iii i ii iii AT BE CY EE FI FR GE GR IE IT LU 1 1 LV MT NL PT SI SK SP Notes: Years in which contingent bene ts are activated. Contingent schee i): Bene ts are paid if unepoyent rate in a given eber state in year t is at east 1 percentage point higher than in t-1 (one-year ook-back period). Contingent schee ii): 2-year ook-back period, i.e., bene ts are triggered if unepoyent rate in year t is at east 1 percentage point higher than in t-1 OR t-2. Contingent schee iii): -year ook-back period, i.e., bene ts are triggered if unepoyent rate in year t is at east 1 percentage point higher than in t-1 OR t-2 OR t-. Source: AMECO. 42

45 A.2 Reweighting procedure for odeing (un)epoyent changes In EUROMOD, the baseine househod weights suppied with the nationa cross-sectiona databases have been cacuated to adjust for sape design and/or di erentia nonresponse. In our epirica anaysis, we foow the approach taken by Ivervo et a. (26), Bargain et a. (212) and Dos et a. (212) and epoy reweighting techniques to siuate a sape of repeated cross-sections for each EA eber state over the period 2-1. We ipute various abor force characteristics fro the LFS icro data based on 18 age-gender-education strata. For each subgroup-year ce, these are nuber of peope in the abor force, unepoyent rates, shares of short- and ong-ter unepoyed as we as coverage rates of nationa UI systes. The 18 subgroups are de ned according to the foowing socio-deographic characteristics: gender age (<, 5, >5) education (ow: not copeted priary, priary and ower secondary; idde: upper secondary and post secondary; high: tertiary). (Un)epoyent changes over the period of anaysis are odeed at the subgroup eve. An increase (a decrease) of the group-speci c unepoyent rate is coputed by increasing the weights of the unepoyed (epoyed) in each subgroup whie the weights of the epoyed (unepoyed) are decreased correspondingy, i.e., in e ect a fraction of epoyed (unepoyed) individuas is ade unepoyed (epoyed). Hence, the size and coposition of the abor force in each reweighted cross-section atches the abor force as re ected in the LFS both at the subgroup and aggregate eve. Growth in average earnings aong the intensive argin, odeed in order to account for changes in the tax base, is iputed fro the AMECO-database. 4