SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: This paper reviews the argument that high long-term unemployment in Europe is caused by generous social safety nets in times of economic turbulence. We report on the empirical evidence of a more turbulent economic environment and present the theoretical arguments that establish a link between turbulence and high unemployment. We conclude that a cure to the European unemployment problem must entail a reform of the unemployment insurance system so that benefits decline over the unemployment spell. If the social consensus in Europe makes it difficult to implement declining benefits, we suggest that a complementary way of providing incentives for the unemployed would be to reduce their leisure by imposing work requirements.

Keywords: European unemployment; economic turbulence; unemployment insurance

JEL-codes: E24

30 pages, May 31, 1999

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