Unemployment Insurance, Wage Differentials and Unemployment

The paper explores the relation between wages, wage differentials, and the level and structure of unemployment within a wage bargaining model. There are two types of individuals: skilled and unskilled. The bargained wage of each group depends on the respective replacement rate and determines unemployment rates. Different institutional settings of the unemployment insurance system are considered in a model which includes earnings-related and flat-rate schemes as special cases. Depending on the institutional setting, replacement rates are either exogenous or endogenous. Therefore, shocks may or may not change relevant replacement rates and, thereby may have different effects on unemployment.