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on Public Economics |
| By: | Sibylle Stossberg; David Bartolini; Hansjörg Blöchliger |
| Abstract: | This paper investigates the relationship between fiscal decentralisation and economy-wide disposable income inequality. Drawing on a dataset of up to 20 OECD countries over a period from 1996 to 2011, a regression analysis is performed, relating several indicators of national income inequality and a wide array of fiscal decentralisation indicators. The results indicate a weak, inequality-reducing relationship between decentralisation and income inequality, as measured by the Gini coefficient, but the effect is rather small and unstable across specifications. Fine-graining the analysis by using income percentile ratios, in turn, produces more significant and stable results. It shows that the effects of fiscal decentralisation are not the same along the income distribution. While decentralisation tends to be associated with a reduction in income inequality between high incomes and the median, it is linked to a divergence of low income groups from the median, notably via sub-central tax autonomy. Transfers between levels of government also tend to increase the gap between lower and middle incomes. Interpreting these effects jointly, it seems that mainly middle income earners benefit from fiscal decentralisation. Finally, some insights on decentralisation and regional income inequality are presented. At first sight, fiscal decentralisation does not seem to be associated with income sorting in large jurisdictions, but a more fine-grained analysis is required to answer this question. Décentralisation budgétaire et inégalités de revenu : données empiriques relatives aux pays de l'OCDE Nous étudions dans ce document la relation entre la décentralisation budgétaire et les inégalités de revenu disponible à l'échelle d'une économie. À partir d'un ensemble de données concernant jusqu'à 20 pays de l'OCDE au cours de la période de 1996 à 2011, nous réalisons une analyse de régression mettant en relation plusieurs indicateurs d'inégalités de revenu nationales et un large éventail d'indicateurs de décentralisation budgétaire. Les résultats obtenus font ressortir une faible corrélation inverse entre la décentralisation et les inégalités de revenu, mesurées par le coefficient de Gini, mais cet effet est relativement modeste et instable d'une spécification à l'autre. Lorsqu'on affine l'analyse en utilisant des rapports interquantiles de revenu, on obtient des résultats plus significatifs et stables. Ils montrent que les effets de la décentralisation budgétaire ne sont pas les mêmes suivant les parties de la distribution des revenus examinées. Alors que la décentralisation tend à aller de pair avec une réduction des inégalités de revenu entre les catégories à revenu élevé et la médiane, elle s'accompagne d'une divergence des groupes à faible revenu par rapport à la médiane, notamment liée à l'autonomie fiscale des administrations infranationales. Les transferts entre niveaux d'administration tendent également à creuser l'écart entre les catégories à faible revenu et à revenu moyen. Lorsqu'on interprète ces effets dans leur globalité, il semble que ce sont principalement les personnes aux revenus d'activité moyens qui tirent parti de la décentralisation budgétaire. Enfin, nous présentons certains éléments de réflexion sur la décentralisation et les inégalités de revenu régionales. À première vue, la décentralisation budgétaire ne semble pas être associée à un regroupement par niveau de revenu dans les grandes juridictions, mais une analyse plus fine s'impose sur ce point. |
| Keywords: | fiscal decentralisation, tax autonomy, intergovernmental transfers, regional inequality |
| JEL: | D63 H10 H70 H71 H75 I38 |
| Date: | 2016–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1331-en&r=pbe |
| By: | Falch, Torberg; Justina, Fischer |
| Abstract: | Student achievement has been identified as an important contributor to economic growth. This paper investigates the relationship between redistributive government activities and investment in human capital measured by student performance in international comparative tests in Mathematics and Science during the period 1980 to 2003. In fixed effects panel models, government consumption, government social expenditures, and the progressivity of the income tax system have negative effects on student achievement. These results are robust to a variety of model specifications, such as conditioning on educational expenditures, and alternative measures of student performance from the World Bank. Our estimates indicate that increased government size by 10 percent reduces student achievement by 0.1 standard deviations. |
| Keywords: | Student achievement; welfare state; government size; tax system; panel data; international tests; PISA |
| JEL: | C33 H2 H5 I2 |
| Date: | 2016–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74553&r=pbe |
| By: | David Bartolini; Sibylle Stossberg; Hansjörg Blöchliger |
| Abstract: | Fiscal decentralisation can lead to a more efficient provision of local public goods and services and promote a better match between policies and citizens’ preferences. At the same time, however, there are concerns about whether all regions will gain from more autonomy. Decentralisation may not lift all boats, with “poor” regions losing competitiveness with respect to better endowed ones, thus increasing regional disparities. The present work investigates the relationship between fiscal decentralisation and regional inequality within countries. Particular attention is paid to the different channels through which decentralisation can affect disparities: taxing powers, spending autonomy and the vertical fiscal imbalance. The empirical analysis, which is conducted on a sample of 30 OECD countries for the period 1995-2011, suggests that a balanced fiscal structure, where local spending is mainly financed by local taxation, reduces regional disparities, by providing an incentive to better use local resources and implement policies that favour economic development. Décentralisation budgétaire et disparités régionales Si la décentralisation budgétaire peut permettre d’améliorer l’efficience de la fourniture des biens et services publics locaux et promouvoir une meilleure adéquation entre les politiques publiques et les préférences des citoyens, la question de savoir si toutes les régions peuvent tirer parti d’une plus grande autonomie est source de préoccupation. Il est possible que la décentralisation ne profite pas à toutes les régions, et qu’elle se traduise, pour les régions « pauvres » par une perte de compétitivité par rapport à d’autres mieux dotées, exacerbant ainsi les disparités régionales. Les travaux en cours consistent en une analyse du lien entre la décentralisation budgétaire et les inégalités régionales au sein des pays. Une attention particulière y est accordée aux différents vecteurs par lesquels la décentralisation peut influer sur les disparités : compétences en matière fiscale, autonomie au niveau des dépenses et déséquilibre budgétaire vertical. Cette analyse empirique menée à partir d’un échantillon de 30 pays de l’OCDE sur la période 1995-2011, tend à démontrer qu’une structure budgétaire équilibrée, dans laquelle les dépenses locales sont financées essentiellement par la fiscalité locale, a pour effet de réduire les disparités régionales, car elle incite à une meilleure utilisation des ressources locales et à la mise en oeuvre de politiques qui favorisent le développement économique. |
| Keywords: | fiscal decentralisation, panel data, regional inequality |
| JEL: | H71 H77 R11 |
| Date: | 2016–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1330-en&r=pbe |
| By: | Svensson, Roger (The Research Institute of Industrial Economics); Westermark, Andreas (Research Department, Central Bank of Sweden) |
| Abstract: | Gesell taxes on money holdings have received attention in recent decades as a way of alleviating the zero lower bound on interest rates. Less known is that such a tax was the predominant method used to generate seigniorage in large parts of medieval Europe for around two centuries. When the Gesell tax was levied, current coins ceased to be legal tender and had to be exchanged into new coins for a fee - an institution known as renovatio monetae or periodic re-coinage. This could occur as often as twice a year. Using a cash-in-advance model, we analyze under which conditions agents prefer to re-mint their coins and the system generates tax revenues. We also analyze how prices fluctuate over an issue period. |
| Keywords: | Seigniorage; Gesell tax; periodic re-coinage; cash-in-advance model |
| JEL: | E31 E42 E52 N13 |
| Date: | 2016–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0327&r=pbe |
| By: | Alex Rees-Jones; Dmitry Taubinsky |
| Abstract: | This paper shows that accounting for variation in mistakes can be crucial for welfare analysis. Focusing on consumer underreaction to not-fully-salient sales taxes, we show theoretically that the efficiency costs of taxation are amplified by 1) individual differences in under reaction and 2) the degree to which attention is increasing with the size of the tax rate. To empirically assess the importance of these issues, we implement an online shopping experiment in which 2,998 consumers-matching the U.S. adult population on key demographics-purchase common household products, facing tax rates that vary in size and salience. We find that: 1) there are significant individual differences in underreaction to taxes. Accounting for this heterogeneity increases the efficiency cost of taxation estimates by at least 200%, as compared to estimates generated from a representative agent model. 2) Tripling existing sales tax rates roughly doubles consumers' attention to taxes. Our results provide new insights into the mechanisms and determinants of boundedly rational processing of not-fully-salient incentives, and our general approach provides a framework for robust behavioral welfare analysis. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:feb:natura:00563&r=pbe |
| By: | Morone, Andrea; Nemore, Francesco; Nuzzo, Simone |
| Abstract: | While a basic theoretical principle in public economics assumes that individuals’ behaviour is fully-optimizer with respect to the introduction of a tax, an increasing body of research is presenting evidence that agents decision making is often affected by non-negligible cognitive biases, which could be responsible for lower market performance as well as for deviations from standard theoretical predictions. This paper extends the latter strand of research focusing on two trend topics in public economics: tax salience and tax incidence. While the former refers to the prominence of the tax, the latter places emphasis on the statutory vs. factual division of tax payments. Is market performance affected by the salience of the tax? Is the incidence of a tax independent of which side of the market it is levied on (Liability Side Equivalence Principle, LES)? We address these questions through a laboratory experiment in which one unit of a fictitious good is traded through a double-auction market institution. Based on a panel data analysis, our contribution shows that a non-salient tax reduces both the allocational and informational efficiency of the market with respect to the instance in which the tax is salient. Moreover, we show that the Liability Side Equivalence Principle does not hold in practice. |
| Keywords: | Tax incidence,Tax salience,Liability Side Equivalence,choice behaviour,laboratory |
| JEL: | C91 H20 H21 H30 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:146916&r=pbe |
| By: | Felix Arnold; Hansjörg Blöchliger |
| Abstract: | This paper surveys the state and evolution of GDP per capita in 281 regions of OECD countries for the time period 1995 – 2013. It puts a special focus on the disparities between the regions. These can be substantial: In 2013, GDP per capita of the least and most developed region varied by a factor of roughly ten. Using standard inequality measures like the coefficient of variation or the Gini coefficient, it is found that inequality has been decreasing between countries, while within-country disparities have often widened. Furthermore, transition matrices reveal that mobility within the distribution over time is higher in countries with larger degrees of fiscal decentralisation. This suggests that decentralisation allows regions to “take matters into their own hands”. Implications of other factors that correlate with the level of economic development are also discussed. Le PIB régional dans les pays de l'OCDE : comment les inégalités ont-elles évolué au fil du temps ? Nous étudions dans ce document l'état et l'évolution du produit intérieur brut (PIB) par habitant dans 281 régions de pays de l'OCDE au cours de la période 1995-2013. Nous mettons l'accent sur les disparités entre régions, qui peuvent être substantielles. En 2013, le PIB par habitant variait d'un facteur de 1 à 10 environ entre les régions les moins développées et les plus développées. À partir de mesures classiques des inégalités telles que le coefficient de variation ou le coefficient de Gini, nous parvenons à la conclusion que les inégalités ont diminué entre les pays, tandis que les disparités se sont souvent accentuée à l'intérieur de chaque pays. En outre, des matrices de transition montrent que la mobilité à l'intérieur de la distribution au fil du temps est plus forte dans les pays caractérisés par un degré relativement élevé de décentralisation budgétaire. Cela laisse à penser que la décentralisation permet aux régions de « prendre les choses en mains ». Nous examinons également les implications d'autres facteurs corrélés au niveau de développement économique. |
| Keywords: | regions, inequality, GDP-per-capita |
| JEL: | D30 E01 H70 I31 O10 O57 R11 R12 |
| Date: | 2016–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1329-en&r=pbe |
| By: | Mathias Dolls; Philipp Doerrenberg; Andreas Peichl; Holger Stichnoth |
| Abstract: | How can retirement savings be increased? We explore a unique policy change in the context of the German pension system to study this question. As of 2004, the German pension authority started to send out annual letters providing detailed and comprehensible information about the pension system and individual expected pension payments. This reform did not change the level of pensions, but only manipulated the knowledge about and salience of expected pension payments. Using German tax return data, we exploit two discontinuities in the age cutoffs of receiving such a letter to study their effects on private retirement savings. Our results show that the letters increase private retirement savings. The effects are fairly sizable and persistent over several years. We further show that the letter increases labor earnings, and that the increase in savings partly crowds out charitable donations. Moreover, we present evidence suggesting that both information and salience drive the savings effect. Our paper adds to a recent literature showing that policies that go beyond the traditional neoclassical reasoning can be powerful to increase savings rates. |
| JEL: | D14 H24 H55 J26 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22684&r=pbe |
| By: | Francisco Martí (Banco de España); Javier J. Pérez (Banco de España) |
| Abstract: | Spain’s public finances have been under significant stress during the crisis, despite pre-crisis fiscal surpluses and low levels of public debt. The impact of the crisis and an initial phase of counter-cyclical activism exacerbated the existing (structural) fiscal vulnerabilities. To correct the fiscal imbalances, a significant number of bold policy actions were taken, affecting taxation, public spending, national fiscal rules and the structure of the public sector. In this paper we discuss the evolution of public finances in Spain during the financial crisis, framing crisis-related fiscal policy measures within medium-term economic trends and focusing on policy responses to the financial crisis. We also touch upon the main policy challenges ahead. |
| Keywords: | fiscal policy, Great Recession, public deficit, public debt, Spanish economy |
| JEL: | E60 H12 H50 H60 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1620&r=pbe |
| By: | Miyazaki, Takeshi |
| Abstract: | The present study examines the incentiv¬e effects of fiscal equalization transfers on local corporate tax rates from theoretical and empirical perspectives. The study focuses on additional corporate tax on capital, which is exempt from calculations of equalization grants. A theoretical investigation reveals that a rise in equalization rate increases additional capital tax rates. The theoretical prediction is empirically examined using panel data of Japanese municipalities for 1990–2000. It is found that a higher equalization rate in fiscal equalizing transfers gives municipalities an incentive to raise corporate tax rates exempt from the transfer scheme. |
| Keywords: | Intergovernmental fiscal transfers; regression discontinuity design; tax competition; tax effort |
| JEL: | H7 H71 H77 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74337&r=pbe |
| By: | David Pearl |
| Abstract: | In February this year, Prime Minister Turnbull took Goods and Services Tax (GST) reform off the table, but history would suggest it will come into play again. Consumption is simply too important a tax base to ignore if we want to improve our tax system. With that in mind, and in light of the recent GST debate, this article offers a dispassionate examination of the economics and politics of this tax. The popular myths and misconceptions about the GST are highlighted. The point is made that fairness objectives are better achieved in other ways, including through our progressive personal income tax system. The article concludes with a brief discussion of the barriers to GST reform. It suggests that there may be sound psychological reasons for resistance to change. The importance of trust is stressed in this connection. This is not a matter of keeping promises, but requires effective, credible and patient advocacy from would-be reformers. |
| Date: | 2016–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:appswp:201630&r=pbe |
| By: | Stanley L. Winer (Department of Economics, Carleton University) |
| Abstract: | In this chapter I provide an overview of the political economy of taxation in democratic states by considering the three most important issues in the field: (1) the evolution of the power to tax in (what are now) the mature constitutional democracies; (2) the nature and determinants of modern tax structures; and (3) redistribution in pluralistic societies over various horizons and in the face of economic shocks. The discussion considers the ideas and models that have arisen as scholars have grappled with these related issues, and points to some of the outstanding problems that may be worth pursuing in future research. |
| Keywords: | Taxation, Oxford Handbook, political economy, public choice, power to tax, tax structure, fiscal redistribution |
| JEL: | D72 D78 H2 H24 |
| Date: | 2016–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:16-15&r=pbe |
| By: | Jörg Pätzold; Hannes Winner (WIFO) |
| Abstract: | This paper provides evidence of evasion in the context of a widely used commuter tax allowance, and explores evasion spillovers as a determinant of the individual compliance decision. For this purpose, we exploit discontinuities in the commuter allowance scheme and employ a research design resting on a large panel of individual tax returns. We find that around 30 percent of all allowance claims are overstated and, consistent with deliberate tax evasion, we observe sharp reactions of tax payers to thresholds where the allowance discretely jumps to a higher amount. Further, we use variation in job changes to uncover spillover effects from the work environment on the individual compliance decision. These effects appear to be asymmetric: job changers moving to companies with a higher fraction of cheaters increase their cheating. In contrast, movers to companies with a lower fraction of cheaters tend not to alter their reporting behaviour. We provide suggestive evidence that the spillover has more to do with an information environment, but can ultimately not reject other behavioural explanations such as asymmetric persistence of norms. |
| Date: | 2016–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2016:i:526&r=pbe |
| By: | Krueger, Dirk; Ludwig, Alexander |
| Abstract: | In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium. |
| Keywords: | Progressive Taxation,Education Subsidy,Transitional Dynamics |
| JEL: | E62 H21 H24 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:110r&r=pbe |
| By: | Alexander Ludwig (Goethe University Frankfurt); Dirk Krueger (University of Pennsylvania) |
| Abstract: | We develop an analytically tractable overlapping generations model with idiosyncratic earnings risk to study optimal capital income taxes. We derive simple closed form expressions for optimal taxes along the transition towards a new long-run equilibrium. We emphasize the important interplay between a precautionary savings motive and pecuniary externalities which the planner takes into account when determining optimal taxes. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:942&r=pbe |
| By: | Esther Hauk; Andrea Lanteri; Albert Marcet |
| Abstract: | This paper studies optimal policy with partial information in a general setup where observed signals are endogenous to policy. In this case, signal extraction about the state of the economy cannot be separated from the determination of the optimal policy. We derive a non-standard first order condition of optimality from first principles and we use it to find numerical solutions. We show how previous results based on linear methods, where separation or certainty equivalence obtains, arise as special cases. We use as an example a model of fiscal policy and show that optimal taxes are often a very non-linear function of observed hours, calling for tax smoothing in normal times, but for a strong fiscal reaction to output when a recession is quite certain and the economy is near the top of the Laffer curve or near a debt limit. |
| Keywords: | optimal policy; partial information; separation; calculus of variations; fiscal policy |
| JEL: | C63 D82 E60 H60 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:932&r=pbe |
| By: | Sajedi, Rana (Bank of England) |
| Abstract: | Given the weak economic performance of many countries since the recent crisis, there is an increasing need for structural reforms aimed at promoting long-run economic growth. Structural reforms can entail short-run output costs unless offset by a demand expansion. When monetary policy is constrained and cannot carry out this short-run expansion, there is a potential role for fiscal policy. In this case, reforms can go against fiscal consolidation in the short run, although they are expected to improve public finances in the long run. The aim of this paper is to quantify the short-run fiscal costs and long-run fiscal benefits of reforms, and investigate how the design of reforms can affect this trade-off. The focus is on the euro area, which has been particularly affected by high unemployment. In the model, both the costs and benefits of reforms are generally small, although increasingly large reforms entail larger rises in deficit-to-GDP in the short run. Results suggest that reforms in labour markets have little effect on public finances in the long run, but their short-run costs can be ameliorated by combining them with product market reforms. |
| Keywords: | Structural reform; fiscal policy; effective lower bound |
| JEL: | E65 H20 H63 |
| Date: | 2016–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0620&r=pbe |
| By: | Motloja, Lehlohonolo; Makhoana, Tsholofelo; Kassoma, Rooyen; Houdman, Rozadian; Phiri, Andrew |
| Abstract: | Following the global recession period of 2009, much debate has been cast on the role of tax policy in improving economic growth in the South African economy. In our paper, we estimate optimal tax rates for South Africa using the optimization model of Scully (1996, 2003) applied to quarterly data collected for periods before the crisis (i.e. 1994:Q1 – 2009:Q2) and for periods after the crisis (2009:Q2 – 2016:Q2). We estimate our optimization model using the autoregressive distributive lag (ARDL) bounds test approach. Our empirical estimates reveal an insignificant relationship between taxation and economic growth for periods prior to the global recession period whereas we find a significant relationship for periods subsequent to the recession, with an optimal rate of tax being found to be 22 percent of GDP. These empirical results highlight that whilst tax policy had an insignificance effect on economic growth in South Africa before the recession of 2009, tax policy appears to play an important role in promoting short-run and long-run economic growth in the post-recession era. Furthermore, our results suggest that fiscal authorities should ensure that tax revenue as a share of GDP should do not exceed the optimal rate of 22 percent in the interest of attaining higher rates of economic growth. |
| Keywords: | Tax; Economic growth; Fiscal Policy; Optimal tax rate; Optimal government size; South Africa; Sub-prime crisis; Global recession |
| JEL: | C13 C32 C52 E62 H21 O40 |
| Date: | 2016–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74342&r=pbe |
| By: | Deli, Yota; Lambert, Derek; Lawless, Martina; McQuinn, Kieran; Morgenroth, Edgar |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp540&r=pbe |
| By: | Javier J. Pérez (Banco de España); Marie Aouriri (Banque de France); Maria M. Campos (Banco de Portugal); Dmitrij Celov (Bank of Lithuania); Domenico Depalo (Banca d’Italia); Evangelia Papapetrou (Bank of Greece); Jurga Pesliakaite (Bank of Lithuania); Roberto Ramos Magdaleno (Banco de España); Marta Rodríguez-Vives (European Central Bank) |
| Abstract: | This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms. |
| Keywords: | public employment, public wages, labour market, fiscal policies, fiscal consolidation |
| JEL: | H50 E62 J45 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1607&r=pbe |
| By: | Christopher J. O'Leary (W.E. Upjohn Institute for Employment Research); Burt S. Barnow (George Washington University) |
| Abstract: | The federal-state system of unemployment insurance (UI) in the United States was established by the Social Security Act of 1935 during the Great Depression. Under the program, states provide temporary partial wage replacement to involuntarily unemployed workers with significant labor force attachment. The federal government induced states to establish UI programs through two means: 1) a uniform federal tax imposed on employer payrolls, with a 90 percent reduction granted in states operating approved UI programs, and 2) grants to states to administer their programs. The system has evolved into a collection of separate state programs adapted to different regional, economic, and cultural contexts that all meet the same standards. This paper reviews state practices concerning applicant eligibility, benefit generosity, and benefit financing, with the aim of revealing lessons for a possible European unemployment benefit system (EUBS). We examine areas of federal leadership, explicit federal-state cooperation, and state innovation. While the U.S. system offers some good ideas for setting up an EUBS, there are also lessons in some shortcomings of the U.S. experience. We identify areas of risk for individual and institutional moral hazard in a multi-tiered UI system, and give examples of monitoring methods and incentives to ameliorate such risks. We suggest approaches for gradual system development, encouraging lower-tier behavior, benefit financing, and responses to regional and system-wide crises. |
| Keywords: | unemployment insurance, European unemployment benefit system, multi-tiered system, moral hazard, incentives, public finance |
| JEL: | J65 H81 H87 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:upj:weupjo:16-264&r=pbe |