Heterogeneous labor markets and generosity towards the unemployed: an international perspective

We investigate the key differences in the distributions of European, Canadian and US labor forces to explain cross-country differences in unemployment insurance generosity in a dynamic model with indivisible labor and with constraints on borrowing. Agents differ in education leading to country-specific differences in employment probabilities and income prospects. Moral hazard is allowed to vary across countries so that it is a free parameter in our specification. We derive the degree of generosity of unemployment insurance favored by the majority of the population and contrast this with that chosen by a social planner. Calibrating the model using data allows us to predict moral hazard within each country, even though this is an otherwise unmeasurable statistic. Journal of Comparative Economics33 (1) (2005) 88-106.