Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market
AbstractIn many search models of the labor market, unemployment insurance (UI) is conveniently interpreted as the value of leisure or home production and is, therefore, treated as a parameter. However, in reality, UI has to be funded through taxation that might be distortionary. In this paper, I analyze the welfare implications of different taxation systems within two equilibrium models of unemployment: random search and directed search. In a random search model without taxes, efficiency is typically not achieved, unless the so-called Hosios condition is satisfied. If the bargaining power of firms is large, a lump-sum tax can discourage firms from entering and improve welfare. In a directed search model without taxes, constrained efficiency is always achieved. Since firms “direct” workers to apply to them by posting wages, raising UI funds in a lump-sum manner always distorts the efficient allocation, as it gives firms an incentive to be excessively aggressive in their attempt to maximize the probability of filing up their vacancies. I discuss two ways through which this externality can be internalized and efficiency can be re-established.
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Bibliographic InfoPaper provided by University of California, Davis, Department of Economics in its series Working Papers with number 1218.
Date of creation: 24 Sep 2012
Date of revision:
Directed Search; Random Search; Unemployment Insurance; Optimal Taxation;
Other versions of this item:
- Athanasios Geromichalos, 2012. "Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market," Working Papers 1219, University of California, Davis, Department of Economics.
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-06 (All new papers)
- NEP-DGE-2012-10-06 (Dynamic General Equilibrium)
- NEP-IAS-2012-10-06 (Insurance Economics)
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