This is the first paper that assesses the importance of different stabilization channels of an unemployment insurance system for the euro area (EA). We provide insights on the potential added value of common unemployment insurance (UI) as a fiscal risk sharing device which crucially hinges on its ability to provide interregional smoothing. Running/ncounterfactual simulations based on micro data for the period 2000-13, we and that 10 per cent of the income fluctuations due to transitions into and out of un-employment would have been cushioned through interregional smoothing at EA-level. Smoothing gains are unevenly distributed across countries, ranging from -5 per cent in Malta to 22 per cent in Latvia. Our results suggest that the interregional smoothing potential is as important as intertemporal smoothing through debt. We and that four member states would have been either a permanent net contributor or net recipient. Contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insurance effects. We also study heterogeneous effects within countries and discuss moral hazard issues at the level of individuals, the administration and economic policy.

The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.