Two individuals, Harry and Ron, are both working. Harry faces a 10 percent chance of becoming unemployed for three months and losing $12,000 in income. Ron's probability of becoming unemployed is lower, at 8 percent, but he too would be unemployed for three months and would lose $12,000 in income.
1. Suppose the employment insurance benefit rate is 55 percent so that 55 percent of lost earnings are replaced. Calculate the expected payout for Harry and Ron.
2. Suppose that participating in the national employment insurance program is compulsory and that the annual premium of $594 is paid by both individuals. Does this scheme involve redistribution? If so, who gains and who loses?
3. If an actuarially fair premium was to be charged, what annual premium would each worker be charged?