Two types of unemployment insurance systems are studied. In one, unemployed workers receive benefits while those on reduced hours do not, as in North America (at least until recently). In the other, short-time compensation is paid to workers on reduced hours, as in Europe. With incomplete experience-rating of unemployment insurance taxes, the first system leads to inefficient temporary layoffs. The latter system does not lead to layoffs but does lead to inefficient hours per worker. Some cross-country evidence is presented regarding these effects. The implication of the analysis is that policy reform on the tax, not the benefit, side of the system is the best way to reduce the inefficiencies implied by both types of unemployment insurance.
This paper includes excerpts from a paper published in the _Journal of Political Economy_ (December 1989, vol. 97, no. 6, pp. 1479-1496): "Unemployment Insurance and Short-Term Compensation: The Effects of Layoffs, Hours per Worker, and Wages" by Kenneth Burdett and Randall Wright. The excerpts appear here with the permission of the University of Chicago. All rights reserved.