DP1609 | Employment Turnover and Unemployment Insurance

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Two features distinguish European and US labour markets. First, most European countries have a considerably more generous unemployment insurance system. Second, the duration of unemployment and employment spells are substantially higher in Europe ? employment turnover is lower. We show that self-insurance, i.e. saving and borrowing, is a good substitute for unemployment insurance when turnover is as high as in the United States. If the insurance system is less than perfectly actuarially fair, the employed median voter will prefer self-insurance to the unemployment insurance system if turnover is high. We also show that high unemployment insurance makes the unemployed more willing to wait for a job with low separation rates. This could make both high turnover/low insurance (US) and low turnover/high insurance (Europe) stable equilibria. Low turnover also leads to a strong divergence between the long- and short-run interests of the employed. In the absence of devices that enable the median voter to bind future voters to some level of insurance, the voting cycle must be long to support a high level of insurance.