Bismarck versus Beveridge : flat- and earnings-related unemployment insurance in an efficiency wage framework

A higher unemployment compensation increases the incentive to shirk in efficiency wage models. If there is a stronger dependence of unemployment benefits on current earnings, these incentives will be reduced. An unemployment insurance with earnings-related benefits is thus characterised by higher employment than one with flat-rate benefits. It is investigated under which conditions this advantage persists in the longer term when financial constraints such as an ex-post constant level of benefits, a cash hmit or a balanced budget rule apply, or when firms are constrained to zero profits. -- balanced budget ; cash limit ; earnings-related benefits ; efficiency wages ; flat-rate benefits ; long-run ; unemployment insurance