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.