Minimum wages and unemployment insurance in a federation of states

with Max Friese

In a federation of states with partial mobility of households and firms we analyze four different regimes of de(centralized) minimum wage setting and de(centralized) unemployment insurance. Unemployment insurance is always efficient by decentral decisions. In contrast, for symmetric states minimum wages are set efficiently only, if it is organized centrally. Decentralized minimum wage setting appears to be generically inefficient, because the decision makers either externalize the cost of unemployment via the pooled insurance budget or exploit migrational externalities. Only with full mobility, the opposing migration effects outweigh the pooling effect. Our results suggest that contrary to insurance which can be efficiently organized decentrally, a pure redistribution like minimum wages should be centralized.