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Premium differentiation in the unemployment insurance system and the demand for labor

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  • Alessie, Rob

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Bloemen, Hans

Abstract

In this study we investigate the effect of the introduction of premium differentiation (experience rating) in the Dutch Unemployment Insurance system on the demand for labor. We formulate a model of labor demand, based on the model by Bentolila and Bertola (1990), in which we distinguish two types of workers: the "young" and the "old". This distinction is made, as one of the major motives for opening the discussion around premium differentiation in the Netherlands is the wish to reduce the inflow of older workers into unemployment. In the model, labor adjustment costs (hiring and firing costs) are linear. The model allows for uncertainty in the business cycle. Premium differentiation is incorporated in the model as a rise in firing costs, accompanied by a decrease in unemployment insurance premium payments. Values for the model parameters are determined to quantify the effect of premium differentiation on the demand for labor in various sectors of the Dutch economy. We compute the effect of premium differentiation on the steady state level of labor demand. We also compute the effect of premium differentiation on the level of profits.

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Bibliographic Info

Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0002.

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Date of creation: 2000
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Handle: RePEc:dgr:vuarem:2000-2

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Web page: http://www.feweb.vu.nl

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Keywords: Unemployment Insurance; premium differentiation; labor demand;

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  1. Burda, Michael C., 1991. "Monopolistic competition, costs of adjustment, and the behavior of European manufacturing employment," European Economic Review, Elsevier, vol. 35(1), pages 61-79, January.
  2. Blanchflower, David G & Oswald, Andrew J, 1994. "Estimating a Wage Curve for Britain: 1973-90," Economic Journal, Royal Economic Society, vol. 104(426), pages 1025-43, September.
  3. Holmlund, Bertil & Zetterberg, Johnny, 1991. "Insider effects in wage determination : Evidence from five countries," European Economic Review, Elsevier, vol. 35(5), pages 1009-1034, July.
  4. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  5. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, vol. 36(5), pages 1013-1047, June.
  6. Bertola, Giuseppe & Caballero, Ricardo J, 1994. "Cross-Sectional Efficiency and Labour Hoarding in a Matching Model of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 435-56, July.
  7. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  8. Topel, Robert H, 1983. "On Layoffs and Unemployment Insurance," American Economic Review, American Economic Association, vol. 73(4), pages 541-59, September.
  9. Graafland, J.J. & Huizinga, F.H., 1998. "Taxes and benefits in a non-linear wage equation," MPRA Paper 21076, University Library of Munich, Germany.
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Cited by:
  1. Ruud de Mooij, 2004. "Towards efficient unemployment insurance in the Netherlands," CPB Memorandum 100, CPB Netherlands Bureau for Economic Policy Analysis.

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