Subsidizing vs. Experience Rating of Unemployment Insurance in Unionized Labor Markets

Alternative ways to organize government subsidies to unemployment insurance (UI) are analyzed in a right-to-manage model where industry level unions run UI funds of their own. It is shown that equilibrium unemployment is decreasing in the share of UI financed by the employed union members. A reduction in the proportional subsidies matched by an increase in the lump sum grant is shown to bring about wage moderation and improve employment. If labor market parties can influence the level of benefits, a subsidy scheme with a fixed assistance per unemployed is preferable to one covering a fixed share of the total UI costs.