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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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File URL: https://ub-madoc.bib.uni-mannheim.de/29630/1/WP2011_1.pdf
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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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References

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  1. Marcelo Veracierto, 2003. "Firing costs and business cycle fluctuations," Working Paper Series WP-03-29, Federal Reserve Bank of Chicago.
  2. Manuel Toledo & Jose I. Silva, 2005. "Labor Turnover Costs and the Cyclical Behavior of Vacancies and Unemployment," 2005 Meeting Papers 775, Society for Economic Dynamics.
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  4. Christopher A. Pissarides, 2007. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," CEP Discussion Papers dp0839, Centre for Economic Performance, LSE.
  5. Landais, Camille & Michaillat, Pascal & Saez, Emmanuel, 2010. "Optimal Unemployment Insurance over the Business Cycle," CEPR Discussion Papers 8132, C.E.P.R. Discussion Papers.
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  8. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 0853, European Central Bank.
  9. 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.
  10. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
  11. Pierre Cahuc & André Zylberberg, 2008. "Optimum income taxation and layoff taxes," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00255794, HAL.
  12. Stanislav Rabinovich & Kurt Mitman, 2011. "Pro-cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model," 2011 Meeting Papers 1247, Society for Economic Dynamics.
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  14. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2012. "Wage Rigidity and Job Creation," Working Papers 629, Barcelona Graduate School of Economics.
  15. Olivier J. Blanchard & Jean Tirole, 2008. "The Joint Design of Unemployment Insurance and Employment Protection: A First Pass," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 45-77, 03.
  16. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
  17. Coles, Melvyn, 2008. "Optimal unemployment policy in a matching equilibrium," Labour Economics, Elsevier, vol. 15(4), pages 537-559, August.
  18. 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.
  19. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
  20. Lars Ljungqvist & Thomas J. Sargent, 2008. "Two Questions about European Unemployment," Econometrica, Econometric Society, vol. 76(1), pages 1-29, 01.
  21. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  22. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, 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) 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. 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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