Ifo: European unemployment re-insurance could absorb up to 25% of income losses in recessions


This is the press release from German think-tank Ifo Institute:

 

A European unemployment re-insurance system could absorb an average of 15-25 percent of income losses caused by rising unemployment in deep recessions, but various arrangements would need to be made in order to avoid negative incentive effects, according to new research from EconPol Europe.

The research, carried out by EconPol Europe scientific co-ordinator Mathias Dolls from Ifo Institute, is the first evaluation study to assess the importance of different stabilization channels of an unemployment re-insurance scheme for the euro area. It comes following a proposal by Olaf Scholz, the German Finance Minister, for an unemployment stabilization fund in October 2018 and recent comments by European Commission President Jean Claude-Juncker. Juncker said he is in favor of European unemployment insurance but warned that it must not be carte blanche for countries who find themselves in difficulty as a result of lack of reform.

Another concern besides potential moral hazard is that such a scheme could create an unfair system in which some states become permanent beneficiaries, with others providing permanent transfers. The research from EconPol Europe shows how certain features of the re-insurance might mitigate these concerns.

Explains Dolls: “A re-insurance scheme should provide support to member states only during severe recessions. The activation rule of the considered re-insurance contains a double condition that needs to be met for transfer payments to be triggered. Member states receive a one-time transfer from the scheme if unemployment is above its long-term average and the year-on-year increase in the unemployment rate exceeds a certain threshold.”

The paper – based on simulations of household microdata for the period 2000-2016 – considers variants with threshold values of one and two percentage points. If triggered, the transfer amounts to the additional expenditures an average unemployment insurance scheme in the euro area would have to bear in the corresponding year. Dolls add: “The analyzed re-insurance aims at striking a balance between providing stabilization on the one hand and preserving incentives on the other hand.”

The paper finds that the reinsurance would have absorbed on average 15-25 percent of the income losses originating from rising unemployment in deep recessions. This cushioning effect would have arisen through the interregional smoothing channel of the re-insurance scheme which is economically as important as the intertemporal smoothing effect of an average domestic unemployment insurance scheme in the euro area.

In particular, member states with deteriorating labor market conditions in the aftermath of the financial and economic crisis of 2008/09 such as Ireland, Latvia or Spain would have been supported. In the variant with a threshold value in the activation rule of one percentage point, also countries like Austria, Finland, France or Germany would have received transfers from the re-insurance.

Over the whole simulation period, some member states would have been in a net contributor, others in a net recipient position vis-a-vis the re-insurance. The rules triggering contribution and transfer payments would have ensured that no member state turns out as a permanent net contributor or net recipient.

Dolls concludes: “An unemployment re-insurance scheme should be viewed as a potential element of a balanced and more comprehensive reform package for the euro area that contributes to enhanced
 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

Feed news

Latest Forex News

Editors’ Picks

EUR/USD: Trapped in a bull flag on 4H chart

EUR/USD's pullback from Oct.21's high of 1.1179 to 1.1106 has taken the shape of a bull flag on the 4-hour chart. A bull flag represents a pause which usually refreshes higher. A breakout would open the doors for 1.1320. A 4-hour close above 1.1134 would confirm a flag breakout.

EUR/USD News

GBP/USD: Modestly changed to 1.2915 amid fears of UK election

Despite mounting speculations of a general election in the UK, GBP/USD clings to 1.2915 during early Thursday morning in Asia. No major British data highlights the US economic calendar, trade/Brexit news as the key catalysts.

GBP/USD News

USD/JPY declines to 108.60 amid fresh risk aversion, all eyes on the ECB

With the recent uncertainty surrounding the UK’s politics crossing wires, USD/JPY steps back from the previous rise to 108.60 as Tokyo opens for Thursday’s trading session.

USD/JPY News

Gold drops to $1,491 despite downbeat catalysts from Asia, Brexit uncertainty

Despite economic challenges from Asia and uncertainty surrounding the Brexit, Gold prices step back to $1,491 amid Asian session on Thursday. An active economic calendar, including ECB, will be the key.

Gold News

ECB Preview: Draghi's defense of his legacy may drag EUR/USD down

"The ECB is ready to do whatever it takes to preserve the euro." These famous words by Mario Draghi, President of the European Central Bank, are the centerpiece of his legacy.

Read more

Forex MAJORS

Cryptocurrencies

Signatures