The Finance of Unemployment Insurance, Bargaining Structure and Wage Determination in a Unionized Economy

Working Papers 122 Kiander Jaakko

The aim of this paper is to first find out how the way the unemployment insurance (UI) benefits aer financed affects the outcome of a wage bargain. Secondly, related to the first question, the paper aims to investigate how the equilibrium wage is affected by the bargaining structure of the labour market, or the rate of centralization of wage determination in regard with the financing of the UI payments. Wage setting is here called centralized if wage are bargained over on the same level as the UI premiums are decided. In that case the costs of unemployment (which is usually supposed to be caused by excessive wages) are born by those responsible for the wage determination. If wage setting is decentralized, the costs of unemployment remain external to the wage bargainers. In this respect the present paper is related to the earlier discussion on bargaining structure and macroeconomic performance, or the merits of social corporatism.