A Dichotomous Analysis of Unemployment Benefits

TL;DR

This paper presents a new cooperative game theory-based framework for designing fair, sustainable unemployment benefits that promote employment and equality while ensuring fiscal discipline.

Contribution

It introduces a dichotomous valuation rule and a closed-form payroll tax rate within a continuous-time, balanced budget framework, extending to various shared payoff domains.

Findings

Derived a fair, debt-free payroll tax rate.

Framework promotes employment, productivity, and equality.

Robust across different objectives and applicable to multiple domains.

Abstract

This paper introduces a novel framework for designing fair and sustainable unemployment benefits, grounded in cooperative game theory and real-time fiscal policy. The labor market is modeled as a coalitional game, where a random subset of participants is employed, generating stochastic economic output. To ensure fairness, we adopt equal employment opportunity as a normative benchmark and propose a dichotomous valuation rule that assigns value to both employed and unemployed participants. Within a continuous-time, balanced budget framework, we derive a closed-form payroll tax rate that is fair, debt-free, and asymptotically risk-free. This tax rule is robust across alternative objectives and promotes employment, productivity, and equality of outcome. The framework naturally extends to other domains involving random bipartitions and shared payoffs, such as voting rights, health insurance, road tolling, and feature selection in machine learning. Our approach offers a transparent, theoretically grounded policy tool for reducing poverty and economic inequality while maintaining fiscal discipline.