A positive theory of geographic mobility and social insurance

This paper presents a tractable dynamic general equilibrium model thatcan explain cross-country empirical regularities in geographical mobility,unemployment and labor market institutions. Rational agents vote overunemployment insurance (UI), taking the dynamic distortionary effects ofinsurance on the performance of the labor market into consideration.Agents with higher cost of moving, i.e., more attached to their currentlocation, prefer more generous UI. The key assumption is that an agent'sattachment to a location increases the longer she has resided there. UIreduces the incentive for labor mobility and increases, therefore, thefraction of attached agents and the political support for UI. The mainresult is that this self-reinforcing mechanism can give rise to multiplesteady-states-one 'European' steady-state featuring high unemployment,low geographical mobility and high unemployment insurance, and one'American' steady-state featuring low unemployment, high mobility andlow unemployment insurance.