Employment turnover and the public allocation of unemployment insurance

Unemployment benefits are higher and turnover between unemployment and empl oyment is lower in Europe than in the U.S. We model the political determina tion of the unemployment insurance to explain these differences. We show th at saving and borrowing is a good substitute for unemployment insurance whe n turnover is high. With high turnover, the median voter thus prefers low u nemployment insurance. With low turnover, generous unemployment insurance b ecomes more valuable. If the median voter cannot bind future voters, the vo ting cycle must, however, be long in order to support a high level of insur ance. Endogenizing turnover produces the possibility of multiple political equilibria. (C) 1999 Elsevier Science S.A. All rights reserved.