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Social Preferences and Labor Market Policy

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  • Trine Filges
  • John Kennes

    ()
    (Institute of Economics University of Copenhagen)

  • Torban Tranaes

Abstract

We find that the main featues of labor policy across OECD countries can be explained by an equilibrium search model with risk neutral agents and a government that chooses policy to maximize a social welfare function. Optimal policy redistributes income from advantaged to disadvantaged workers. A worker can be disadvantaged in one of two possible ways - they may have less ability to aquire and utilize skills in the workplace or they may have less ability to enjoy leaisure (i.e. home production). The government does not directly observe these attributes, but must infer them from labor market outcomes. The optimal policy is a solution to an incentive compatibility problem, because each worker has some influence over their labor market state. The model explains why passive benefits tend to fall and active benefits tend to increase durng the course of unemployment spell. The model also explains why countries that appear to pursue equity spend more on both active and passive labor market programs.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 562.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:562

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Keywords: competitive search; optimal policy;

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  1. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  2. Michael T. Kiley, 2003. "How should unemployment benefits respond to the business cycle?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-01, Board of Governors of the Federal Reserve System (U.S.).
  3. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  4. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  5. Peter Fredriksson & Bertil Holmlund, 2003. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," CESifo Working Paper Series 922, CESifo Group Munich.
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