The Political Economy of Degressive Unemployment Benefits

Gradual decrease of unemployment benefits is a major feature of social protection in most industrialised countries: the replacement rate (the ratio between the level of welfare benefits and the previous income) typically declines with the length of the unemployment spell. Moreover degressivity of unemployment benefits has significant redistributive effects as the risk of long-term unemployment varies from one individual to another. This paper proposes a formal model of political support for unemployment insurance that takes into account the decrease in the level of benefits over time. A discount factor is introduced that diminishes the level of benefits for long-term unemployed. In this framework we show that preferences for degressivity not only differ with the individual unemployment risk but also with the distribution of risks within the population. In particular demand for degressivity should increase as the heterogeneity of unemployment risk rises. We further argue that this logic has been at work in recent reforms of the unemployment insurance in Europe, presenting empirical support for our theory.