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Optimal labor-market policy in recessions

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  • Philip Jung
  • Keith Kuester

Abstract

The authors examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort they first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. The authors derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Their propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. The authors find this confirmed in a calibration targeted to the U.S. economy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-48.

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Date of creation: 2011
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Handle: RePEc:fip:fedpwp:11-48

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Keywords: Unemployment ; Labor market ; Business cycles;

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  1. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2009. "Wage Rigidity and Job Creation," Kiel Working Papers, Kiel Institute for the World Economy 1504, Kiel Institute for the World Economy.
  2. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers, Society for Economic Dynamics 460, Society for Economic Dynamics.
  3. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 35596, London School of Economics and Political Science, LSE Library.
  4. Stanislav Rabinovich & Kurt Mitman, 2011. "Pro-cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model," 2011 Meeting Papers, Society for Economic Dynamics 1247, Society for Economic Dynamics.
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  7. Raj Chetty, 2005. "A General Formula for the Optimal Level of Social Insurance," NBER Working Papers 11386, National Bureau of Economic Research, Inc.
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  16. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 545-579, June.
  17. Lars Ljungqvist & Thomas J. Sargent, 2008. "Two Questions about European Unemployment," Econometrica, Econometric Society, Econometric Society, vol. 76(1), pages 1-29, 01.
  18. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(5), pages 915-38, October.
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  20. Silva, José Ignacio & Toledo, Manuel, 2009. "Labor Turnover Costs And The Cyclical Behavior Of Vacancies And Unemployment," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 13(S1), pages 76-96, May.
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  22. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 10(3), pages 379-402, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Optimal labor-market policy in recessions
    by Christian Zimmermann in NEP-DGE blog on 2011-12-22 04:19:47
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Cited by:
  1. Olivier LHARIDON & Franck MALHERBET & Sébastien PEREZ-DUARTE, 2011. "Does Bargaining Matter in the Small Firm’s Matching Model?," Economics Working Paper Archive (University of Rennes 1 & University of Caen), Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS 201116, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  2. Cahuc, Pierre, 2014. "Search, Flows, Job Creations and Destructions," IZA Discussion Papers 8173, Institute for the Study of Labor (IZA).
  3. Mark Strøm Kristoffersen, 2012. "Business Cycle Dependent Unemployment Benefits with Wealth Heterogeneity and Precautionary Savings," Economics Working Papers, School of Economics and Management, University of Aarhus 2012-19, School of Economics and Management, University of Aarhus.
  4. Pollak, Andreas, 2013. "Employment Insurance and the Business Cycle," MPRA Paper 49358, University Library of Munich, Germany.

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