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How Does Imperfect Competition in the Labor Market Affect Unemployment Policies?

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Author Info

  • Wauthy, Xavier

    (affiliation not available)

  • Zenou, Yves

    ()
    (Stockholm University)

Abstract

We consider a continuum of workers ranked according to their abilities to acquire education and two firms with different technologies that imperfectly compete in wages to attract these workers. Once employed, each worker bears an education cost proportional to his/her initial ability, this cost being higher in the high-technology firm. At the Nash equilibrium, we show that the unemployed workers are those with the lowest initial abilities. We then study different policies that subsidy either the education cost or wages and compare them. We found that the first best allocation can only be implemented by selective policies. We then analyze second best non-selective policies that do not discriminate between workers and firms and show that, in terms of welfare, subsidizing education costs or wages is strictly equivalent.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 340.

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Length: 29 pages
Date of creation: Aug 2001
Date of revision:
Publication status: published in: Journal of Public Economic Theory, 2002, 4 (3), 417-436
Handle: RePEc:iza:izadps:dp340

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Related research

Keywords: inequality; heterogeneous workers and firms; Nash equilibrium in wages; unemployment policies;

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  1. Jellal, Mohamed & Thisse, Jacques-Francois & Zenou, Yves, 2005. "Demand uncertainty, mismatch and (un)employment," Economics Letters, Elsevier, Elsevier, vol. 89(2), pages 248-254, November.
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Cited by:
  1. Jellal, Mohamed & wolff, François charles, 2003. "Dual labor market and strategic efficiency wage," MPRA Paper 38395, University Library of Munich, Germany.
  2. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Straume, 2004. "Good Jobs, Bad Jobs and Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 106(4), pages 703-720, December.
  3. Tasnadi, Attila, 2005. "A way of explaining unemployment through a wage-setting game," Labour Economics, Elsevier, Elsevier, vol. 12(2), pages 191-203, April.

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