An Optimal Financing Scheme for Unemployment Benefit: A Transatlantic Comparison

In this paper we study, in a DSGE model, the properties of an optimal financing scheme for unemployment benefits in a rigid, and in a flexible labor market. Taking inspiration from the US unemployment insurance system, we ask if firms should be taxed in proportion to their layoffs to finance the cost incurred by the unemployment-benefits fund. Moreover, we investigate how macroeconomic variables respond to aggregate shocks when labor market institutions differ. We study how a labor-market reform should be engaged to reduce the cost of fluctuations. The optimal policy is determined using DSGE techniques and the welfare gains are evaluated. We find that an optimal combination of unemployment benefits and layoff taxes is welfare-improving and can also improve labor market performances. In our two benchmark economies, the efficient layoff tax is close to the expected fiscal cost of an unemployed worker. Layoff taxes create a financial incentive for employers to stabilize their employment, reducing the worker flows and unemployment volatility considerably. The welfare gain induced by the reform is sizeable.