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A multiple matching model with endogenous participation : what's new about the supply-side policies?

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  • Etienne Campens

Abstract

This paper aims at build a multiple matching model, in which the decision of activity on the labour market is endogeneous. Most of works on the labour market concern the only demand side. The policies applied on this side of the labour market do not consider the supply side as endogeneous. Thus, no policy can be explorated to improve the labour market situation. The supply policies seem to be the new way of action of the different governments among the European Union. In particular, in France, a policy which increases the level of earned incomes on the low wages is led since 2002, as the Earned Income Tax Credit (EITC) in the United States. This principle, called "Prime Pour l'Emploi" (PPE), is supposed to incite unskilled unemployed to take a job. In this paper, I explain that, with an endogeneous activity choice, such policies may have ambiguous effects on unemployment and social accounts. Indeed, new unemployed workers are attracted on the effective labour market by these job-taking incentives. The unemployement duration increase and the consequences on the social accounts are not obvious. Furthermore, inactivity traps phenomena can appear. I modelize the effects of an alternative policy: tax cuts on low wage associated with minimum wage increase. I show that it improves employment and production at a lower cost for the government.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 301.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:301

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Keywords: Employment policy; skills; search; participation;

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  1. Dale T. Mortensen & Christopher A. Pissarides, 1999. "Job Reallocation, Employment Fluctuations and Unemployment," CEP Discussion Papers dp0421, Centre for Economic Performance, LSE.
  2. John M. Abowd & Francis Kramarz, 1997. "The Costs of Hiring and Separations," NBER Working Papers 6110, National Bureau of Economic Research, Inc.
  3. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation, And Labor Market Flows," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 851-882, 06.
  4. John M. Abowd & Laurence Allain, 1996. "Compensation Structure and Product Market Competition," NBER Working Papers 5493, National Bureau of Economic Research, Inc.
  5. Paul Gomme & Finn E. Kydland & Peter Rupert, 2001. "Home Production Meets Time to Build," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1115-1131, October.
  6. Cahuc, Pierre & Gianella, Christian & Goux, Dominique & Zylberberg, Andre, 2002. "Equalizing Wage Differences and Bargaining Power: Evidence from a Panel of French Firms," CEPR Discussion Papers 3510, C.E.P.R. Discussion Papers.
  7. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
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