An Unemployment Re-Insurance Scheme for the Eurozone? Stabilizing and Redistributive Effects

This paper develops a decomposition framework to study the importance of different stabilization channels of an unemployment re-insurance scheme for the euro area. The paper provides insights on the potential added value of a re-insurance scheme which crucially hinges on its ability to provide interregional smoothing. Running counterfactual simulations based on household micro data for the period 2000-16, the paper finds that on average 15-25 per cent of the income losses originating from rising unemployment in deep recessions would have been absorbed through interregional smoothing effects. The results suggest that the interregional smoothing channel of the re-insurance scheme is economically as important as the intertemporal smoothing effect of an average domestic unemployment insurance scheme in the euro area. The latter would have led to a cushioning effect of 16-27 per cent of large unemployment shocks. The simulated re-insurance scheme would have been evenue-neutral at EA-19, but not at the member-state level. Average annual net contributions would have amounted to -0.1-0.1 per cent of GDP. No member state would have turned out as a permanent net contributor/recipient.