A Dichotomous Analysis of Unemployment Benefits

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.