DP2964 A Positive Theory of Geographic Mobility and Social Insurance

Author(s): John Hassler , José V Rodríguez Mora , Kjetil Storesletten , Fabrizio Zilibotti

Publication Date: September 2001

Keyword(s): employment , migration , geographical mobility , political equilibrium , unemployment insurance , voting

JEL(s): D72 , E24 , J24 , J64 , J65

Programme Areas: International Macroeconomics , Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP2964.asp

This Paper presents a tractable dynamic general equilibrium model that can explain cross-country empirical regularities in geographical mobility, unemployment and labour market institutions. Rational agents vote over unemployment insurance (UI), taking the dynamic distortionary effects of insurance on the performance of the labour market into consideration. Agents with higher cost of moving, i.e. more attached to their current location, prefer more generous UI. The key assumption is that an agent’s attachment to a location increases the longer they have resided there. UI reduces the incentive for labour mobility and increases, therefore, the fraction of attached agents and the political support for UI. The main result is that this self-reinforcing mechanism can give rise to multiple steady-states one ‘European’ steady-state featuring high unemployment, low geographical mobility and high unemployment insurance, and one ‘American’ steady-state featuring low unemployment, high mobility and low unemployment insurance.