A positive theory of geographic mobility and social insurance

Kjetil Storesletten, University of Oslo, IIES and CEPR, Norway
John Hassler, IIES and CEPR, Sweden
José V. Rodríguez Mora, Universitat Pompeu Fabra CREA and CEPR, Spain
Fabrizio Zilibotti, IIES and CEPR, Sweden

Abstract

This article presents a tractable dynamic general equilibrium model explaining cross-country data on geographical mobility, unemployment, and labor market institutions. Rational forward-looking agents vote on unemployment insurance (UI). Agents with higher moving costs (larger attachment to their location) prefer more generous UI. Attachment is assumed to increase with the duration of residence. UI mitigates incentives for moving and increases, therefore, the fraction of attached agents and the political support for UI. This self-reinforcing mechanism can yield two steady-states: one "European" and one "American." The former (latter) features high (low) unemployment, low (high) geographical mobility, and high (low) UI.