Social Risk and Social Insurance

This article analyzes the political support for social insurance, providing micro-foundations of how rational workers demand social protection. Existing studies have focused on the importance of income inequality in the form of redistributive and income effects. Yet they have largely ignored the protective effect stemming from the distribution of risks within society. Using unemployment insurance, I argue that the political demand for unemployment insurance depends on the distribution of risk as well as income in a society. A multiplicative interaction model is employed to test the joint effects of income and risk inequality on replacement rates of unemployment insurance. The empirical evidence shows that: 1) the risk of losing one's job differs significantly across the economic sectors in which people are employed, 2) the impact of risk inequality is positive unless there is excessively high income inequality, and 3) the relationship between income inequality and unemployment benefits is also conditional upon risk inequality.