The impact of a European unemployment benefit scheme on labour supply and income distribution

This paper investigates the effect of introducing a European unemployment insurance scheme (EMU-UI) on the labour supply and income distribution in the Eurozone countries. We simulate various reform scenarios based on structural estimation of the labour supply and using the European tax-benefit microsimulation model EUROMOD. The results show that the labour supply response to the introduction of an EMU-UI differs substantially across countries and depends on the design of the EMU-UI. We find that a flat EMU-UI scheme implies a strong work disincentive but reduces poverty. On the contrary, a fully contribution-related EMU-UI system limits much more the distortions on the labour market in most countries but has limited effects on poverty and inequality. An EMU-UI with a common replacement rate, articulated with floor and ceiling amounts, would allow for upward convergence as it would strongly reduce poverty and inequality in several countries while not inducing substantial labour supply reduction.