Unemployment Insurance and Cultural Transmission

CEP Macro program member Jean-Baptiste Michau examines the evolution of the work ethic and unemployment insurance. Peoples' values affect the moral hazard problem associated with providing unemployment insurance, and thus the implementation of policy. Conversely, there could be another transmission: from policy to values.

The adverse effect of public policies on incentives to work is at the heart of economic analysis. However, in political debate we sometimes hear deeper concerns that, over the long-run, an overly protective welfare state might also have negative consequences for the transmission of values. If working hard is not rewarded, not only will people work less, they will also invest less in transmitting a high work ethic to their children. Younger generations will, in turn, be less receptive to these values. In other words, the concern is that generous welfare policies will gradually make the population lazy. This is the first channel that Jean-Baptiste investigates, the effect of welfare policies on values.

The second is the effect of values on implemented welfare policies. If people are naturally reluctant to work, then the adverse incentive effects of social policies are likely to be large. This would make them so expensive to implement that voters, as taxpayers, would be unlikely to support them.

Jean-Baptiste uses an extended version of the Bisin & Verdier (2001) framework which captures the fact that rather than being something spontaneous, cultural transmission results from an optimizing behavior of parents. When deciding on the level of effort to exert to raise their children to work hard, altruistic parents take into account the policy that will be implemented in the future. The prospect of having a high work ethic is less attractive if children, once they have grown up, will be able to live off generous unemployment benefits for extended periods of time. Combining these two channels, he investigates the equilibrium relationships between values and the welfare state.

Jean-Baptiste argues that the model can account for a substantial fraction of the history of European unemployment since World War II. His work suggests that the introduction, or wide expansion, of unemployment insurance programs just after WWII was followed, a generation later, by an increase in the number of low work ethic individuals registered as unemployed. In this respect, the key feature of the model is the existence of a long lag between the introduction of a policy and the behavioral response of agents. The strength of this explanation is that it is compatible with the coexistence of generous unemployment insurance and low unemployment in the 1950s and1960s. This could therefore be seen as an alternative to the dominant story, defended by Blanchard & Wolfers (2000) and Ljungqvist & Sargent (1998), which relies on the interaction between shocks and institutional rigidities.

The model also allows Jean-Baptiste to suggest possible scenarios for the evolution of future European unemployment. If values do not fall further, we may remain in the current high employment equilibrium. Conversely, if the work ethic continues to deteriorate, the generosity of unemployment benefits will eventually decline sufficiently to prevent opportunistic behavior and, hence, unemployment actually drop.

To read more about Jean-Baptiste Michau's work on unemployment insurance and cultural transmission see:

• "Unemployment Insurance and Cultural Transmission: Theory and Application to European Unemployment" [Full document in Adobe PDF] (Jean-Baptiste Michau), CEP Discussion Papers 0936, June 2009