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The Joint Design of Unemployment Insurance and Employment Protection. A First Pass

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Author Info
Blanchard, Olivier J
Tirole, Jean

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Abstract

Unemployment insurance and employment protection are typically discussed and studied in isolation. ln this paper, we argue that they are tightly linked, and we focus on their joint optimal design in a simple model, with risk averse workers, risk neutral firms, and random shocks to productivity. We show that, in the 'first best', unemployment insurance comes with employment protection - in the form of layoff taxes; indeed, optimality requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations from first best: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and ex-ante heterogeneity of firms or workers. We show how the design must be modified in each case. Finally, we draw out the implications of our analysis for current policy debates and reform proposals, from the financing of unemployment insurance, to the respective roles of severance payments and unemployment benefits.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6127.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6127

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Related research
Keywords: employment protection experience rating layoff taxes layoffs severance payments unemployment benefits Unemployment insurance

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Find related papers by JEL classification:
D60 - Microeconomics - - Welfare Economics - - - General
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

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  1. Acemoglu, Daron & Shimer, Robert, 2000. "Productivity gains from unemployment insurance," European Economic Review, Elsevier, vol. 44(7), pages 1195-1224, June. [Downloadable!] (restricted)
    Other versions:
  2. Dale T. Mortensen & Christopher A. Pissarides, 2002. "Taxes, Subsidies and Equilibrium Labor Market Outcomes," CEP Discussion Papers 0519, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  3. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Blackwell Publishing, vol. 47(2), pages 321-38, January. [Downloadable!] (restricted)
  4. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February. [Downloadable!] (restricted)
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  5. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October. [Downloadable!] (restricted)
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  6. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February. [Downloadable!] (restricted)
  7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  8. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation, Yale University. [Downloadable!]
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  9. Pissarides, Christopher, 2002. "Consumption and Savings with Unemployment Risk: Implications for Employment Contracts," CEPR Discussion Papers 3367, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Fernando Alvarez & Marcelo Veracierto, 1999. "Labor market policies in an equilibrium search model," Working Paper Series WP-99-10, Federal Reserve Bank of Chicago. [Downloadable!]
  11. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February. [Downloadable!] (restricted)
  12. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 37-50, January. [Downloadable!] (restricted)
  13. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December. [Downloadable!] (restricted)
  14. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
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  15. Christopher A. Pissarides, 2002. "Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts," CEP Discussion Papers 0542, Centre for Economic Performance, LSE. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Clark, Andrew & Postel-Vinay, Fabien, 2005. "Job Security and Job Protection," IZA Discussion Papers 1489, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Olivier L'Haridon & Franck Malherbet, 2006. "Employment Protection Reform in Search Economies," IZA Discussion Papers 2304, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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