Events at CERGE-EI

Martin Wiegand

Universitat Pompeu Fabra, Spain

Abstract: This paper studies how local economic conditions shape the optimal design of unemployment benefits across space. I develop a theoretical framework that characterizes the insurance value and fiscal costs of unemployment benefits across locations as a function of (i) local prices, (ii) behavioral responses in unemployment duration and (iii) distortions to location choice. I estimate the fiscal costs of the unemployment duration and migration responses using novel quasi-experimental variation from Germany’s Hartz IV reform, which tied benefit levels to local rents for long-term unemployed individuals. Unemployment durations respond similarly to benefit changes in highand low-price locations. However, higher benefits in expensive regions attract jobseekers, raising fiscal costs. My findings imply that indexing unemployment benefits to local prices makes benefits excessively generous in high-price locations, and that redistribution towards regions with lower prices yields sizable welfare gains.

Full Text: Cities with Benefits