The choice of insurance in the labor market

Employment protection and unemployment benefits are considered the most prominent insurance devices for workers to protect themselves against the risk of unemployment. It occurs that societies either choose a high level of employment protection relative to unemployment benefits or vice versa. This paper explains where countries locate on this trade-off. It is argued that higher coverage of voters out-of-the labor force with intra household transfers yields a politico-economic equilibrium with relatively high employment protection and relatively low unemployment benefits. Cross country data and survey data on voters’ preferences are presented that corroborate the outcomes of the model.