Risk aversion and inequity aversion in demand for unemployment benefits

Abstract

This paper is an empirical study of what motivates net contributors to support redistributive policies. While studies in the area have tended to consider broad measures of inequality and support for redistribution in general, we focus on a single, salient relationship between local unemployment rates and demand for spending on unemployment benefits. Using a particularity of the Spanish labour market, we estimate how workers' stated preferences for unemployment benefits spending respond to changes in the local unemployment rate. We then decompose this response into the part explained by risk aversion, and thus demand for insurance, and the part explained by inequity aversion. Our results suggest that increases in local unemployment rates lead to increased demand by workers for unemployment benefits spending. Moreover, our results are consistent with an insurance motive driving this relationship but provide little support for inequity aversion. Our results suggest that studies of the relationship between inequality and demand for redistribution might benefit from considering both the source and measure of the inequality and the instrument of redistribution.

Cyclical Tax Enforcement

“…In order to deal with this issue, we follow the approach adopted by Backus and Esteller‐Moré (). The initial step of this strategy is to split our sample of surveyed individuals into two groups, the first one—say group 1—composed by people whose risk perception and demand of tax enforcement should not vary along the AC‐specific economic cycle and the second one constituted by the complementary cluster (group 2).…”

“…The initial step of this strategy is to split our sample of surveyed individuals into two groups, the first one—say group 1—composed by people whose risk perception and demand of tax enforcement should not vary along the AC‐specific economic cycle and the second one constituted by the complementary cluster (group 2). To this end, coherently with Backus and Esteller‐Moré (), we provide an estimate of each individual's UR based on their labor market characteristics . This is an estimate of an individual's idiosyncratic risk of unemployment, scaled between 0 and 1, and provides us with a proxy of the impact of the economic cycle on the risk perception/demand of tax enforcement of those individuals.…”

“…Those include occupation, industry of employment, and level of education all interacted with the sector of employment and year effects, ω is a vector of parameters to be estimated, and η ijt is the error term. The predicted probabilities , represent the estimated UR variable (for more details see Backus and Esteller‐Moré , 207). Additionally, we assign a value equal to zero to the UR of retired individuals.…”

“…In order to perform this test, we implement a fully interacted specification (FIS) of Equation (2), by allowing any coefficient to differ depending on whether individual i belongs to group 1 or 2 (see Backus and Esteller‐Moré , 209 for more details).…”