The labor market implications of unemployment insurance and short-term compensation

Abstract

Two types of unemployment insurance systems are studied. In one, unemployed workers receive benefits while those on reduced hours do not, as in North America (at least until recently). In the other, short-time compensation is paid to workers on reduced hours, as in Europe. With incomplete experience-rating of unemployment insurance taxes, the first system leads to inefficient temporary layoffs. The latter system does not lead to layoffs but does lead to inefficient hours per worker. Some cross-country evidence is presented regarding these effects. The implication of the analysis is that policy reform on the tax, not the benefit, side of the system is the best way to reduce the inefficiencies implied by both types of unemployment insurance.