A feasible unemployment-based shock absorber for the Euro area

Abstract:

Based on theoretical insights, this article identifies the broad characteristics that a shock absorber based on unemployment should have in order to be incentive-compatible and politically feasible. It then empirically derives the combination of activation thresholds, experience rating, eligibility criteria and benefit generosity which define the systems offering the highest stabilization for given levels of redistribution.

The analysis suggests that the shock absorber should: (1) give rise to macro cross-national transfers, mimicking those that would be generated by a notional euro-wide unemployment benefit scheme of minimal coverage and generosity, (2) be activated by a trigger and (3) feature partial experience rating. The simulation results, confirmed by robustness checks, show that even systems that do not redistribute resources between countries can have a non-negligible stabilization impact in the medium run. Low benefit take-up rates in southern Europe reduce the stabilization properties and the size of the scheme.