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The Optimal Design of Unemployment Insurance and Employment Protection. A First Pass

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  • Olivier Blanchard
  • Jean Tirole

Abstract

Much of the policy discussion of labor market institutions has been at the margin, with proposals to tighten unemployment benefits, reduce employment protection, and so on. There has been little discussion however of what the ultimate goal and architecture should be. The paper focuses on characterizing this ultimate goal, the optimal architecture of labor market institutions. We start our analysis with a simple benchmark, with risk averse workers, risk neutral firms and random shocks to productivity. In this benchmark, we show that optimality requires both unemployment insurance and employment protection---in the form of layoff taxes; it also requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and heterogeneity of firms or workers. We show how the architecture must be modified in each case. The scope for insurance may be more limited than in the benchmark; so may the scope for employment protection. The general principle remains however, namely the need to look at unemployment insurance and employment protection together, rather than in isolation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10443.

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Date of creation: Apr 2004
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Handle: RePEc:nbr:nberwo:10443

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  1. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  2. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(5), pages 893-928, October.
  3. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 37-50, January.
  4. Christopher Pissarides, 2002. "Consumption and savings with unemployment risk: implications for optimal employment contracts," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 2211, London School of Economics and Political Science, LSE Library.
  5. Dale T Mortensen & Christopher Pissarides, 2001. "Taxes, subsidies and equilibrium labor market outcomes," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 2075, London School of Economics and Political Science, LSE Library.
  6. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262161877, December.
  7. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers, California Los Angeles - Applied Econometrics 21, California Los Angeles - Applied Econometrics.
  8. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
  9. Pissarides, Christopher, 2002. "Consumption and Savings with Unemployment Risk: Implications for Employment Contracts," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3367, C.E.P.R. Discussion Papers.
  10. Fernando Alvarez & Marcel Veracierto, 1998. "Search, self-insurance and job-security provisions," Working Paper Series, Federal Reserve Bank of Chicago WP-98-2, Federal Reserve Bank of Chicago.
  11. Pierre Cahuc & Winfried Koeniger, 2007. "Feature: Employment Protection Legislation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(521), pages 185-188, 06.
  12. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(2), pages 321-38, January.
  13. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
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