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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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  2. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
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  8. Pierre Cahuc & André Zylberberg, 2008. "Optimum income taxation and layoff taxes," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00255794, HAL.
  9. Christopher Pissarides, 2007. "The unemployment volatility puzzle: is wage stickiness the answer?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 4460, London School of Economics and Political Science, LSE Library.
  10. 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, MIT Press, vol. 6(1), pages 45-77, 03.
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  13. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series, European Central Bank 0853, European Central Bank.
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  16. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 50-65, March.
  17. 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.
  18. 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.
  19. 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. Pollak, Andreas, 2013. "Employment Insurance and the Business Cycle," MPRA Paper 49358, University Library of Munich, Germany.
  2. l'Haridon, Olivier & Malherbet, Franck & Pérez-Duarte, Sébastien, 2013. "Does bargaining matter in the small firms matching model?," Labour Economics, Elsevier, vol. 21(C), pages 42-58.
  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, School of Economics and Management, University of Aarhus 2012-19, School of Economics and Management, University of Aarhus.

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