On the Design of a European Unemployment Insurance System

We study the welfare effects of both existing and counter-factual Europeanunemployment insurance (UI) policies using a rich multi-country dynamic generalequilibrium model with labour market frictions. The model successfully replicatesseveral salient features of European labor markets, in particular the cross-countrydifferences in the flows between employment, unemployment and inactivity, as a resultof labour market and UI policy differences across euro area countries. We find thatmechanisms like the recently introduced European instrument for temporary support tomitigate unemployment risks in an emergency (SURE), which allows nationalgovernments to borrow at low interest rates to cover expenditures on unemploymentbenefits, yield sizeable welfare gains.Furthermore, we find that, in spite of the calibrated heterogeneity across euro areacountries, there is a common direction in which they can improve their UI policies; inparticular, a harmonized benefit system that features a one-time payment of aroundthree quarters of income upon separation is welfare improving in all euro areacountries relative to the status quo.Powered