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Search frictions, real wage rigidities and theoptimal design of unemployment insurance: a study in a DSGE framework

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  • Julien Albertini

    ()
    (Centre d’Études des politiques Économiques de l’Université d’Evry (EPEE))

  • Xavier Fairise

    ()
    (Centre d’Études des politiques Économiques de l’Université d’Evry (EPEE))

Abstract

In this paper, we feature the optimal unemployment benefits financing scheme when the economy is subject to labor market failures characterized by search frictions and wages rigidity. We show how policy instruments should interact with labor market imperfections. The US unemployment insurance financing is such that firms are taxes in proportion of their layoffs. The question of the optimal tax schedule naturally arises. Using the DSGE methodology, we investigate the optimal design of the unemployment benefits financing scheme. The welfare gains and the stabilizing effects of this policy are evaluated. If unemployment benefits and layoff taxes are chosen in an appropriate way, welfare and labor market performances can be improved. Search externalities and wage rigidities cause sizeable welfare losses and influence the optimal design of the financing scheme. Without wage rigidities the efficient layoff tax corresponds to the expected fiscal cost of an unemployed worker. Conversely, when wages are rigid, the cost firms should support is much higher.

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Bibliographic Info

Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 09-03.

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Length: 39 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:eve:wpaper:09-03

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Related research

Keywords: DSGE models; search and matching friction; layoff tax; wage rigidities;

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References

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  1. Francesco Zanetti, 2006. "Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model," Computing in Economics and Finance 2006 445, Society for Computational Economics.
  2. Harding, Don & Pagan, Adrian, 2006. "Synchronization of cycles," Journal of Econometrics, Elsevier, vol. 132(1), pages 59-79, May.
  3. L'Haridon, Olivier & Malherbet, Franck, 2009. "Employment protection reform in search economies," European Economic Review, Elsevier, vol. 53(3), pages 255-273, April.
  4. Cahuc, Pierre & Malherbet, Franck, 2004. "Unemployment compensation finance and labor market rigidity," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 481-501, March.
  5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
  6. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  7. Gilles, Joseph & Olivier Pierrard & Henri R. Sneessens, 2003. "Job Turnover, Unemployment and Labor Market Institutions," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003013, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  8. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," IHEID Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008.
  9. David Card & Phillip B. Levine, 1992. "Unemployment Insurance Taxes and the Cyclical and Seasonal Properties of Unemployment," NBER Working Papers 4030, National Bureau of Economic Research, Inc.
  10. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
  11. Krause, Michael U. & Lubik, Thomas A., 2006. "The cyclical upgrading of labor and on-the-job search," Labour Economics, Elsevier, vol. 13(4), pages 459-477, August.
  12. Faia, Ester, 2006. "Optimal monetary policy rules with labor market frictions," Working Paper Series 0698, European Central Bank.
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