Association for Public Policy Analysis & Management

It has become increasingly recognised that deeper fiscal integration is needed at the European Monetary Union level to provide better shock absorption against economic shocks (European Commission 2012, 2014; Andor 2014). The potential of a common unemployment insurance benefit at the European Monetary Union level (EMU-UI hereafter) to smooth fluctuations in income across member states has attracted particular attention. In addition to its benefits in terms of stabilisation, a common EMU-UI could be designed in such a way that a minimum level of income protection is ensured for individuals in case of unemployment, hence strengthening the social dimension of the EMU. In this paper we explore the potential of an unemployment insurance benefit at EMU level to improve the income protection available to the individuals and their families in case of unemployment. Our analysis uses an illustrative EMU-UI scheme, which has a common design across countries and can therefore be considered as a benchmark with respect to which gaps in national unemployment insurance schemes are assessed. In particular, the EMU-UI would be intended to reduce the extent of current gaps in coverage where these are sizeable due to stringent eligibility conditions, to increase generosity where current unemployment benefits are low relative to earnings and to extend duration where this is shorter than 12 months. Our analysis compares the extent of the effect of these improvements across all countries from the Monetary Union using EUROMOD to simulate entitlement to the national and EMU-UI and to calculate the effect on household disposable income. Contrary to previous studies, which have analysed the effects of an EMU-UI based on information about individuals currently unemployed in the data, we use “stress-testing” techniques (Avram et al., 2011; Figari et al., 2011; Fernandez Salgado et al., 2013) and simulate the effect of an EMU-UI on all individuals currently in work, in case they would become unemployed. Our approach allows us to provide a generalisable assessment of the effects of existing unemployment benefit systems and what an EMU benefit could add, rather than one referring only to a particular set of labour market conditions. We find that our illustrative common EMU-UI reduces the risk of poverty for the new unemployed and has a positive effect on household income stabilisation. The extent of these effects varies in size across countries for two main reasons: notable differences in design of national unemployment insurance schemes and differences in labour force characteristics across countries. In countries such as France, Finland, Austria and Germany there is little effect of the common EMU-UI on poverty risk and income stabilisation, while Greece, Italy, Latvia, Lithuania and Malta benefit the most. Our analysis highlights potential areas of future research in terms of improving the design of the EMU-UI and accounting for national or EMU level ways of financing it.