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Federal Reserve Bank of St. Louis
Working Papers
Universal Basic Income versus Unemployment Insurance
Alice Fabre
Stéphane Pallage
Christian Zimmermann
Abstract

In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.


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Alice Fabre & Stéphane Pallage & Christian Zimmermann, Universal Basic Income versus Unemployment Insurance, Federal Reserve Bank of St. Louis, Working Papers 2014-47, 14 Nov 2014.
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Keywords: Universal basic income; Idiosyncratic shocks; Unemployment insurance; Heterogeneous agents; Moral hazard
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