Rankin and Houston are both working. Houston faces a 4 percent chance of becoming unemployed...
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Rankin and Houston are both working. Houston faces a 4 percent chance of becoming unemployed for one year losing $24,000 in income. Rankin has a higher probability of becoming unemployed at 12 percent but he too would be unemployed for one year and would lose $24,000 in income.
a. Suppose the employment insurance benefit rate is 55 percent so that 55 percent of lost earnings are replaced. Calculate the expected payout for Rankin and Houston.
b. Suppose that a compulsory national insurance program is to be created where workers paid the same premium. What annual premium would have to be paid by both individuals. Does this scheme involve ex-ante redistribution? If so, who gains and who loses?
c. If an actuarially fair premium was to be charged, what annual premium would each worker be charged?
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