The Macroeconomic Effects of Common Minimum Standards for Unemployment Benefit Schemes in EU member states

This study examines the impact on the automatic stabilisation properties of national unemployment benefit systems of a European policy initiative that would introduce minimum standards to those systems. These minimum standards are a net replacement rate of at least 75%, a minimum duration period of 12 months and a coverage ratio of 50%. We conduct a number of simulations using the macroeconometric multi-country model NiGEM. We conclude that establishing these minimum standards, which would broadly mean national systems converging to the best performers on the three criteria, would strengthen the automatic stabilisers in Europe. Economic downturns and hikes in unemployment are cushioned somewhat. The effects we find are perceptible but not large. In part this is due to the fact that we cannot focus on the marginal propensity to consume out of additional income by unemployed households alone. Apart from its social-policy impacts, a strategy of raising minimum standards in national unemployment benefit schemes could make a contribution, along with other measures, to improving economic governance within Europe and especially the euro area.