EQUITY AND EFFICIENCY IN UNEMPLOYMENT-INSURANCE

This paper is concerned with equity and efficiency in unemployment insurance. It examines the rationales for unemployment insurance, or more generally, social security. It stresses that social security is a second-best solution, since, in practice, taxes that do not distort economic decisions and benefits without moral hazard are impossible. The paper determines a relation between the feasible levels of equity and efficiency, i.e., the output possibilities curve. Three typical views on equity are confronted with this output possibilities curve: the extreme liberal view, the moderate liberal view and the egalitarian view. We construct two output possibilities curves for unemployment insurance in The Netherlands: one curve, assuming that the Dutch labour market is characterized by excess supply and another curve, assuming that the Dutch labour market is instantaneously cleared by flexible wages. The equilibrium model yields substantially higher efficiency costs of Dutch unemployment insurance than the disequilibrium model. Finally, we calculate the output gains of a mini-system of unemployment insurance. Again, the results indicate that much depends on what is in the eye of the beholder.