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Search frictions, real wage rigidities and the optimal design of unemployment insurance

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  • Albertini, Julien
  • Fairise, Xavier

Abstract

In this paper, we study the optimal unemployment benefits financing scheme when the economy is subject to labor market imperfections characterized by real wage rigidities and search frictions. The US unemployment insurance financing is such that firms are taxed proportionately to their layoffs to finance unemployment benefits. Using DSGE methodology, we investigate how policy instruments should interact with labor market imperfections. It is shown that wage rigidities in a search and matching environment cause welfare costs, especially in the absence of an incentive-based unemployment insurance. This cost is mainly due to the distorting effect of wage rigidities which generate inefficient separations. We show that the optimal unemployment benefits financing scheme – corresponding to the Ramsey policy – offsets labor market imperfections and allows implementation of the Pareto allocation. The second-best allocation brings the economy close to the Ramsey allocation. The implementation of the optimal policies clearly highlights the role of labor market institutions for short-run stabilization.

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  • Albertini, Julien & Fairise, Xavier, 2013. "Search frictions, real wage rigidities and the optimal design of unemployment insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1796-1813.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:9:p:1796-1813
    DOI: 10.1016/j.jedc.2013.03.010
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    Cited by:

    1. Albertini, Julien & Auray, Stéphane & Bouakez, Hafedh & Eyquem, Aurélien, 2021. "Taking off into the wind: Unemployment risk and state-Dependent government spending multipliers," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 990-1007.
    2. Marius Clemens & Guillaume Claveres, 2017. "Unemployment Insurance Union," 2017 Meeting Papers 1340, Society for Economic Dynamics.
    3. Jocelyn Maillard, 2020. "Heterogeneity, Rigidity and Convergence of Labor Markets in the Euro Area," Annals of Economics and Statistics, GENES, issue 140, pages 127-167.
    4. Julien Albertini & Xavier Fairise, 2018. "Layoffs, recalls and experience rating," Working Papers halshs-01879560, HAL.
    5. Andrea Gerali & Elisa Guglielminetti & Danilo Liberati, 2021. "(In)efficient Separations, Firing Costs and Temporary Contracts," Temi di discussione (Economic working papers) 1330, Bank of Italy, Economic Research and International Relations Area.
    6. Albertini, Julien & Fairise, Xavier & Terriau, Anthony, 2023. "Unemployment insurance, recalls, and experience rating," Journal of Macroeconomics, Elsevier, vol. 75(C).
    7. Ahrens, Steffen & Nejati, Nooshin & Pfeiffer, Philipp L., 2015. "Layoff taxes, unemployment insurance, and business cycle fluctuations," Kiel Working Papers 1988, Kiel Institute for the World Economy (IfW Kiel).
    8. Markus Gebauer, 2021. "Complementary jobs and optimal matching," LABOUR, CEIS, vol. 35(3), pages 291-310, September.

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    More about this item

    Keywords

    DSGE models; Search and matching frictions; Layoff tax; Wage rigidities;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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