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Search frictions, real wage rigidities and the optimal design of unemployment insurance

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  • Julien Albertini

    (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)

  • Xavier Fairise

    (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - Université du Maine, TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV))

Abstract

In this paper, we study the optimal unemployment benefits financing scheme when the economy is subject to labor market imperfections characterized by real wage rigidities and search frictions. The US unemployment insurance financing is such that firms are taxed proportionately to their layoffs to finance unemployment benefits. Using DSGE methodology, we investigate how policy instruments should interact with labor market imperfections. It is shown that wage rigidities in a search and matching environment cause welfare costs, especially in the absence of an incentive-based unemployment insurance. This cost is mainly due to the distorting effect of wage rigidities which generate inefficient separations. We show that the optimal unemployment benefits financing scheme - corresponding to the Ramsey policy - offsets labor market imperfections and allows implementation of the Pareto allocation. The second-best allocation brings the economy close to the Ramsey allocation. The implementation of the optimal policies clearly highlights the role of labor market institutions for short-run stabilization.

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Paper provided by HAL in its series Working Papers with number halshs-00870055.

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Date of creation: Mar 2013
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Handle: RePEc:hal:wpaper:halshs-00870055

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

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