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the amsterdam centre for european studies ssrn research paper 2019/06 design of a unemployment (re)insurance scheme: lessons from us experience christiaan luigjes georg fischer frank vandenbroucke this work is licensed under creative commons attribution 4 0 international license © luigjes* fischer** vandenbroucke*** 2019 *university email: c f luigjes@uva nl **vienna institute economic fischer@wiiw ac at *** universiteit i g vandenbroucke@uva www aces uva abstract american system insurance (ui) often cited as model potential re-insurance schemes while oversimplified comparisons are to be avoided there europe can learn federal- state relations regarding ui we distinguish three aspects system: first in 1930s federal government was able solve collective action problem that impeded development state-level programs; second during 1950s congress enacted backstop depleted trust funds used finance regular benefits; third 1970s added an extra layer based on intergovernmental co-financing benefits which intensifies crises and thus reinforces protection stabilization where when it most needed now exercise interest about buttressing national systems with supranational shows federal-state cooperation has overcome problems enhanced proved great importance recession effectively expand unemployed workers programs period high rising thereby contribute relevant way efforts obama administration however also some structural weaknesses view what might developed eu identify two risks level depending set-up federal-level financing lead retrenchment terms macroeconomic divergence between vulnerable these although may not its main current challenge simultaneously – other besetting insurmountable draw both positive cautionary lesson minimum requirements generosity coverage levels fundamental prerequisites any keywords: fiscal federalism introduction1 2012 report future monetary union (emu) presented by presidents council commission eurogroup central bank suggested create shock absorption mechanism: “an insurance-type euro area countries” one option mentioned capacity would act “complement or partial substitute systems” (van rompuy et al p 11) since then idea ‘european benefit scheme’ (eubs) particular emu-level ‘unemployment re- insurance’ garnering significant attention 2 her agenda commission’s president ursula von der leyen promises propose “european reinsurance scheme” (von 10) french german ministers le maire scholz agreed scheme july 2018 ecb draghi considered hearing parliament such important (draghi 2018; 2018) spd eu-election program explicitly calls fund reinsure (spd 2019) senior politicians3 including vice-chancellor refer besides social-democrats election manifesto greens cites need risk sharing counter policy makers who favor concept necessarily face hostile audience opinion public support cross-border hits member states but crucially depends features adequate incentives take up employment active 1 thank suzanne simonetta roel beetsma critical comments suggestions version working replaces 2019-version been released online too early accident see among others (2018) (2017a 2017b) carnot (2017) dolls beblavy lenaerts brandolini (2016) strauss dullien (2014) gros andor ragot (2019) 3 former party nahles explained: “we along lines financial power 27 must stand stabilize shocks prevent mass once situation improves will flow back ” https://europeangreens eu/priorities-2019-what-european-greens-fight#manifesto (vandenbroucke discuss concern shortcomings 5 1. caveats reference debates eurozone-level mechanism happenstance supports purchasing citizens downturn therefore automatic stabilizer par excellence existing unions either opt downright centralization (historically canada germany) they demand convergence organization provide really (like combines decentralization) rational behavior reasons pooling enhances resilience against asymmetric notion ‘asymmetric shocks’ should understood broadly here: symmetric origin play out very differently individual countries because conditions differ advantage argument stabilizers more particularly degree cross- border allows interregional smoothing 6 reason why applies completely across no value per se externality; country properly insures itself helps neighbors externality matter common all members organize effective fact have ingredients classical problem: increases labor costs without coordination competitive pressure militates sufficiently generous explained next section indeed response forum volume 52 (may/june 2017) intereconomics journal excellent account issues wandner relatively broad consensus order economically politically legitimate organizes intertemporal issue debt eurozone business cycles partly synchronized symmetric; combined cf de grauwe ji (2017); effectiveness emu whole cluster principles: sufficient rates market segmentation proliferation leave part force poorly insured unemployment; activation individuals implementation principles each ‘stability-supporting’ domestic our strongest arguments conversely stability-supporting become fortiori imperative organized: agree other’s if governments cannot guarantee their functions adequately words tabled here just enhance stability moreover quality policies intrinsically mutually related: condition self-evident further ado develop formal basis appendix various degrees –illustrated caveat concerns level: commitment authority lend induce retrench own generally diminish effort (or federal) aggregate states’ diminishes extent ‘retrenchment risk’ exact shape depend preferences attitudes leaders concerning shown linked first: case dynamic leads social rather than e ‘divergence reduction via commits (our caveat) unavoidable: supranational) sometimes ‘takes over’ less role even explicit purpose intervention and/or (rather convergence) backdrop ‘reduced stabilization’ takes form real examined consider 2. history outline united echoes genesis partnership wherein distinct responsibilities regulation circumstances autonomy operating governments’ primarily through extended follow analysis keep mind different teach europeans legislation provided show how final steps were protecting incomes times making substantial contribution economy regard move (creating benefits) subject related gradually emerged context notably lack ‘minimum requirements’ state’s created 1935 wake depression pursuing interlinked objectives objective offer wage replacement periods involuntary help maintain dispersal trained breakdown standards (price 1985 24) made sense feared interstate tax competition: concerned individually businesses relocate could had tread lightly closely guarded constitutional balance strong following comply those finances respective payroll complies rate reduced 90 percent mostly (to return detail 3) almost complete setting eligibility criteria normal required plays due introduced 1954 1970 ‘backstop’ example receive advance pay obligations advances repaid runs deficit consecutive years charge employers penalty-tax importantly law provides extension maximum duration given rises above certain threshold (we ‘triggers’ below) financed equally ad hoc emergency extensions possible contingent congressional approval fully federally (partially) follows logic complementary adds 7 anticyclical impact especially (dullien 2014 63) crisis laid bare (fischer 3. functioning basic stood test time well crucial factor longevity alter parameters same competition relevance ensures payment extending oversight increasingly emphasized necessity reemployment encouraged grants exchange best practices combination incremental adaptations continued interests recent exhibited building decades re-emerged resulted inadequate funding multiple solutions successful overcoming loosing predominantly taxes lobbied employer organizations lower cope revenues number tightened simply acquiesced near-insolvent 8 long-term perspective appear short-term electoral pressures myopic designed ways: illustrate alternative options impacts choices illustrated figures a3 a4 a5 corresponds qua figure a5; ‘incentive effect’ policy-makers better incentive effect models (although noted only imply permanently activated) does totally preclude possibility indicated earlier substitution intended solvency targets none binding elected legislators theory preempt levies requirement levy least permits reduce employers’ below ‘standard rate’ employer’s so practice actual applied exercising flexibility facto increasing measure today many low still retain credit 9 another essential taxable base (‘tax base’) equal set deemed race bottom adjusted indexed 1983 raised bases varying yet insufficient degrees) run deficits pressuring address insolvency calculated share ineffective lost over last triggers relies proven unreliable original (iur) measures jobs covered iur affected determine themselves became insensitive trends measured total (tur) (o’leary & pp 136-137) consequently downturns triggered barnow 2016 13-14) tighten manifold: (as above) do want respect paid (2019 145) emphasizes obligation maintaining shrinking determined grateful pointing half ideological aversion general apply restrictive recipiency stronger push local assume nevertheless profit improved neighboring attitudinal differences towards result developments increased after followed template resulting fairly homogeneous initially 44) utilized started diverge currently vary somewhat widely 10 finally before 1994 advisory compensation (acuc 1996) reluctant hit confronted 36 insolvent funds11 receiving place led despite did trigger took extraordinary (vroman woodbury 2014) proposed 100 50 adopt tur (actual unemployment) legislated additional 99 weeks accept ‘non-reduction rule’ (states rates) strongly jobless additionally available ‘modernization’ use expanding introducing short-term-work updating old it-systems reached historic 2011 2013) clearly paquier o’leary 11 partially severity lowest point (simonetta overcompensated newly tied expired january returned abandoned modernization retrenched eight exploited loophole non-reduction rule standard robust maintained kept systemic improvements contrast revoked organized utilize already solvent diversity present temporarily muted again post-crisis evolution 12 graph increase typically allowed usa manner specific 13 vroman discusses changes consequence factors results deep oecd temporary unique broader comparing immervoll richardson (2013) source: unsurprising tensions briefly revisited mixture myopia political oriented welfare (weaknesses legacy solution 1930s) stemming recently expense meant true presentation general: intrinsic minimize (section a5) 14 generate outcomes being schelkle (2017 chapters argues ambiguous effects shift cost rescues security congenial; illustrates whereby overall (aggregate) decreases free adjust fit recognizing outgoing 600 nationwide floor states15 host (dol 2016) 16 experts reforms urgently (for thorough proposals adopted 4. experience: inspiration examples tempting close analogy caution comparison origins distinct: encourage existed before; inception homogenous well-established predating method regulate capacity: enticed adhere quid pro quo 1) dollars 2) neither resources nor mandate process institutions decision-making approved agile difficult resistance single sovereign neigh impossible reach resolution system? relationship creation 15 limit discussion encouragement services mutual learning influx buoyed recessions strengthened income massively numbers bolstered (briefly discussed footnotes 14) fourth conditionality imposing interventions showed conditionality: optional stopped glass half-full half-empty limited emphasize conditional 17 massive require major change imagine equivalent taken architecture creates nature mean driver activated (perverse) weaker wage-cost competitiveness ideologically motivated dislike supporting likely constituted contributions obviously states; leeway perverse neutralized? historically rely five presidents: “completing europe`s union” discussions group budgetary instrument ensure potential; instead relied steadily diminished (which determines strength incentives) remained unchanged structure comprehensive architectural upward trend 1958 negatively affects compensated conclusion needs carefully ‘top-up’ (cf footnote 7) ‘accommodate’ suboptimal avoid pitfalls seems quite diverse starting reminder leadership offered advised define approach historical make lasting erosion inaction highly hence moments unsuitable new stricter difficulty pursue well- outset definition negotiation pan-european undoubtedly unduly pessimistic hand european-level government: observation underscores build initiative realm solid acquired extensive expertise hard soft benchmarking domain promotion pillar rights solemnly proclaimed november 2017 constitutes useful framework succession integrity long underlying erosion; otherwise long-run extremely implement happen manipulation instance linking gdp good direction short holds valuable blueprint policies: graphical simplified federation responsible taxation sheds light highlights (re-)insurance representation story told differs respects existence given; initial schemes; offers people complementing providing alternatively exactly impact) permanent: stylized (implicitly) depicted permanent whilst canadian belgian swiss system) actually works yields conceptual blocks understand multi-tiered types risk: associated whether basically characterized (i) (their duration) (ii) job search beneficiaries suitability (below summarize ‘job conditions’) (iii) finding improving skills capacities impediments a1 decision focus core parameter: lever (focusing highlight described body paper; intention picture graphs constructed simplification: average proportional to) authorities treated constants represented presupposes specified exogenous 18 horizontal axis rate: sum necessary activities; latter constant go ‘high’ ‘low’ vertical months person (going ‘short’ ‘long’) line sm ‘feasible set’ s (a maximal security); m collected means abstraction changing activity affect zero (hence it: extreme market-liberal policy) curve containing indifference policy-makers: indifferent combinations (they answer question: ‘how much you taxes?’) 19 curves (relative burden impose) flat; unemployed) steep choose feasible satisfaction policy- (at highest attained policies) optimal them somewhere simplicity always homothetic (i expansion paths linear); hold presenting smooth considerable simplification reality key dynamics polities funded addition consists fixed (paid federation) shifts vertically upwards dashed s’m’ a2 suppose distance s’ s’m’) independently principle display enjoy s’-s adapt (augmented) preferences: p’ (the difference s); federation’s decreasing replace reaction dotted ‘democratic’: values highly; dashed-and- ‘republican’: ‘democratic’ ‘republican’ points democratic higher republican state); react compare d d’ r r’ mainly let protection; improvement modest decreased considerably stringent patterns convergence; assumption everywhere (some observations reactions ‘modernization grants’ correspond theoretical analysis: ‘republican ‘democratic positions stops ) think bit harder ‘complementary extra-number transfer lump money states: allow strings attached (no ui) improve (but s’-s) (in spent money) 20 mix a3) yield ‘lump transfer’ level; replaced expanded sponsored ‘re-insurance’ severe note left decide ‘do’ (between states) initiative: type insurance: pure guarantees every whatever foresees guaranteed 25 a; b 35 argued similar state- politicians suffer availability softens budget constraints reducing relying deal benefits: gap normally shaped (from policy-makers’ view) p” corner solution: zero; collect a4) curves: remains box 22-23); conclude problematic variant intelligent month follows: dollar spends pays set: s’m choice (on s’m) reimburse ’50 reimbursement’ ‘conditional’ invested support: operates administrative let’s same; captures reimbursement ‘matching’) kind emphasis (given curves) compared depict homothetic) means: – l l’ (increased citizens); decrease ol (indicated arrow); t t’ (ol l; reduced) 21 ‘own effort’ organizational obtain little state’ ‘improved protection’ ‘less taxation’ remain excluded here) a1-a5 readily one? belgium (and organized) regions (largely) scenario full generates incentive; elsewhere labeled ‘institutional moral hazard’ sensitive sensitivity institutional hazard conceived materialize ways call supported ‘program a’; borne becomes state-financed unemployment-related (say b’) caseloads gives vigorous reemploying caseload influenced (e support) drawing crossing hands learned summarized obtains achieve direct technically achieved funds) directly upon limits possibilities (some) rapidly severely references acuc (1996) findings recommendations: 1994-1996 washington dc: jara h x sutherland designing 49(4) 184-203 k feasibility (https://www ceps eu/publications/feasibility-and-added- value-european-unemployment-benefits-scheme) carta d’amuri unemployment-based absorber 54(5) 1123–1141 n kizior mourre euro-area: simulation ceb 17/025 y boom busts governance barnard baere (ed (pp 160-191) cambridge: cambridge university press dol year 2017: justification training service department fuest neumann peichl area? alternatives using microdata 25(1) 273-309 question mep weizsäcker: ep committee http://www europarl europa eu/cmsdata/151460/monetary%20dialogue%2009 07 2018_ en pdf zone gütersloh: bertelsmann stiftung (2017a) reflection deepening 31 (com(2017) 291) (2017b) instruments stable within communication december 822 final) partnership: reflections iza 129 1-42 roadmap https://www economie gouv fr/files/files/pdf/2018/finances-euro_area_roadmap- redistribution ‘game changer’ working-age families? migration papers 150 america: europe? insights 23(june) 1-22 24 january) ist die antwort speech spd- fraktionsvorsitzenden andrea unemployment-benefit coverage: drivers outlook paris: j insurance? 20(1) 1-4 upjohn 16-264 price (1985) 1935-85 bulletin 48(10) 22-32 reform: evidence-based recommendations fixing broken 131-210) kalamazoo michigan: w civiliser capitalisme crise du libéralisme européen retour politique fayard solidarity understanding experiment oxford: oxford reform request 23-64) kommt zusammen und macht stark! wahlprogramm für europawahl am 26 mai debate appam conference inequalities: addressing growing policymakers worldwide london 13-14 june van barroso juncker (2012) genuine (december 2012) brussels hazard: vaccination metaphor 52(3) 154-159 burgoon kuhn nicoli sacchi duin hegewald hits: influences citizen (eurs) aissr wood lievens assistance (137) brussels: u my europe: guidelines 2019-2024 https://ec eu/commission/interim_en 103-130) 67(1) 253-268