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Optimal Labor-Market Policy in Recessions

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  • Jung, Philip
  • Kuester, Keith

Abstract

We 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 we 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. We derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Our propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. We find this confirmed in a calibration targeted to the U.S. economy.

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Bibliographic Info

Paper provided by University of Mannheim, Department of Economics in its series Working Papers with number 11-1.

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Date of creation: 2011
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Handle: RePEc:mnh:wpaper:29630

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Keywords: unemployment ; search and matching ; endogenous separations;

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  8. David Domeij, 2005. "Optimal Capital Taxation and Labor Market Search," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 623-650, July.
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  16. Kurt Mitman & Stanislav Rabinovich, 2011. "Pro-Cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model," PIER Working Paper Archive 11-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  17. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  18. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, 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
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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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) 201116, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  2. Pollak, Andreas, 2013. "Employment Insurance and the Business Cycle," MPRA Paper 49358, University Library of Munich, Germany.
  3. Cahuc, Pierre, 2014. "Search, Flows, Job Creations and Destructions," IZA Discussion Papers 8173, Institute for the Study of Labor (IZA).
  4. Mark Strøm Kristoffersen, 2012. "Business Cycle Dependent Unemployment Benefits with Wealth Heterogeneity and Precautionary Savings," Economics Working Papers 2012-19, School of Economics and Management, University of Aarhus.

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