We explore the implications of replacing current unemployment benefit (UB) systems by
unemployment accounts (UA). Under the UA system, employed people would be required to
make ongoing contributions to their unemployment accounts, and the balances in these
accounts would then be available to them during periods of unemployment. The government
would be able to undertake balanced-budget redistributions among the UAs, taxing the
contributions of the rich and subsidizing those of the poor. When people retire, they could use
their remaining UA balances to top up their pensions. Under the unemployment benefit
system, people are in effect rewarded for being unemployed (through the unemployment
benefits) and penalized for being employed (through the taxes that finance the
unemployment benefits). The UA system alleviates these externality problems. For when an
unemployed person makes withdrawals from his UA, he is thereby diminishing the amount of
funds that are available to him later on.
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