Informal family insurance and the design of the welfare state

We study the problem of unemployment benefit provision when the family is also a provider of social insurance. As a benchmark, a simple model is presented where risksharing motives govern intra-family transfers and more generous unemployment benefits, provided by the State, crowd out family risk-sharing arrangements one-forone. The model is then extended to capture the idea that the State has an advantage vis-a-vis the family in the provision of insurance because it can tax individuals, whereas the family must rely on self-enforcing agreements. In this case, the effect of State transfers on intra-family transfers is found to be more than one-for-one. Thus, somewhat perversely, both informal transfers and total insurance transfers to the unemployed fall as the State's generosity increases. This does not imply that the optimal Welfare State is zero. Our results still hold when families are assumed to be better than the State at monitoring the job search activities of the unemployed. --Self-enforcing contracts,Optimal welfare generosity

Partisan social happiness

We use data on the subjective well-being of more than a quarter of a million people living in the OECD over the period 1975-92 to study the behavior of partisan social happiness functions. Controlling for personal characteristics of the respondents, year and country fixed effects and country specific time trends, we find that the data describe social happiness functions for left-wing and right-wing individuals where inflation and unemployment enter negatively. We use these functions to test the root assumption of partisan business cycle models where leftwing individuals care more about unemployment relative to inflation than rightwingers (e.g. Alesina (1987)). Bootstrap confidence intervals suggest that up to 90 per cent of the time the evidence is consistent with this assumption. We also find that left-wingers like increases in government consumption more than rightwingers, that the latter have become more concerned with inflation over time and that the poor (rich) behave differently from the left (right). Finally, we find that individuals declare themselves to be happier when the party they support is in power, even after controlling for economic variables. Our findings are hard to explain using median voter models but are to be expected in a partisan world. --Median voter,partisan business cycles,subjective well-being

The determination of unemployment benefits

While much empirical research has been done on the labour market consequences of unemployment benefits, there is remarkably little evidence on the forces determining benefits. The paper presents a simple model where workers desire insurance against the possibility of unemployment and unemployment benefits increase the unemployment rate. We then conduct, what we believe, is one of the first empirical analyses of the determinants of the parameters of the unemployment benefit system. Using OECD data for 1971-1989, controlling for year and country fixed effects, and controlling for the political colour of the government, we find evidence suggesting that benefits fall when the unemployment rate is high. This is consistent with the tax-effect described in Wright (1986) and Atkinson (1990). There is weaker evidence that benefits increase with positive changes in the unemployment rate, which may be proxying for the inflow rate and could be called an insurance effect. --endogenous unemployment benefits,unemployment,politics

The consequences of labour market flexibility: Panel evidence based on survey data

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-90. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. The analysis of inflows and vacancies present some inconsistencies, although there is some evidence that the correlation between inflows and the business cycle is stronger in more flexible labor markets (again this is stronger for females). We also find some evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence. --Job security provisions,subjective data,employment,unemployment

The determination of unemployment benefits

While much empirical research has been done on the labour market consequences of unemployment benefits, there is remarkably little evidence on the forces determining benefits. The paper presents a simple model where workers desire insurance against the possibility of unemployment and unemployment benefits increase the unemployment rate. We then conduct, what we believe, is one of the first empirical analyses of the determinants of the parameters of the unemployment benefit system. Using OECD data for 1971-1989, controlling for year and country fixed effects, and controlling for the political colour of the government, we find evidence suggesting that benefits fall when the unemployment rate is high. This is consistent with the tax-effect described in Wright (1986) and Atkinson (1990). There is weaker evidence that benefits increase with positive changes in the unemployment rate, which may be proxying for the inflow rate and could be called an insurance effect

Rational institutions yield hysteresis

We argue that labor market institutions are endogenous. Our analysis focuses on the government's decision to set unemployment benefits in response to an unemployment shock in a simple, reduced-form model of the labor market. It is found that the largest increases in benefits should occur in economies where the adverse incentive effects of benefits are largest. Adjustment costs of changing benefits can introduce hysteresis in benefit setting and unemployment. Both (very) bad and good temporary shocks (including monetary) can permanently reduce unemployment benefits and the unemployment rate. A desirable feature of the model is that the mechanism yielding hysteresis (which requires a concave utility function) ceases to operate when unemployment tends to one

Partisan social happiness

We use data on the subjective well-being of more than a quarter of a million people living in the OECD over the period 1975-92 to study the behavior of partisan social happiness functions. Controlling for personal characteristics of the respondents, year and country fixed effects and country specific time trends, we find that the data describe social happiness functions for left-wing and right-wing individuals where inflation and unemployment enter negatively. We use these functions to test the root assumption of partisan business cycle models where leftwing individuals care more about unemployment relative to inflation than rightwingers (e.g. Alesina (1987)). Bootstrap confidence intervals suggest that up to 90 per cent of the time the evidence is consistent with this assumption. We also find that left-wingers like increases in government consumption more than rightwingers, that the latter have become more concerned with inflation over time and that the poor (rich) behave differently from the left (right). Finally, we find that individuals declare themselves to be happier when the party they support is in power, even after controlling for economic variables. Our findings are hard to explain using median voter models but are to be expected in a partisan world

The consequences of labour market flexibility: Panel evidence based on survey data

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-90. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. The analysis of inflows and vacancies present some inconsistencies, although there is some evidence that the correlation between inflows and the business cycle is stronger in more flexible labor markets (again this is stronger for females). We also find some evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence

Informal family insurance and the design of the welfare state

We study the problem of unemployment benefit provision when the family is also a provider of social insurance. As a benchmark, a simple model is presented where risksharing motives govern intra-family transfers and more generous unemployment benefits, provided by the State, crowd out family risk-sharing arrangements one-forone. The model is then extended to capture the idea that the State has an advantage vis-a-vis the family in the provision of insurance because it can tax individuals, whereas the family must rely on self-enforcing agreements. In this case, the effect of State transfers on intra-family transfers is found to be more than one-for-one. Thus, somewhat perversely, both informal transfers and total insurance transfers to the unemployed fall as the State's generosity increases. This does not imply that the optimal Welfare State is zero. Our results still hold when families are assumed to be better than the State at monitoring the job search activities of the unemployed

The macroeconomics of happiness

A large literature in macroeconomics assumes a social objective function, W(p, U), where inflation, p, and unemployment, U, are bads. This paper provides some of the first formal evidence for such an approach. It uses data on the reported well-being levels of approximately one quarter of a million randomly sampled Europeans and Americans from the 1970's to the 1990's. After controlling for personal characteristics, year dummies and country fixed effects, we find that the data trace out a W(p, U) function. It is approximately a linearly additive "misery index". The paper calculates the implied dollar value of a low inflation rate. It also examines the structure of happiness equations across countries and time