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Labor market policy in the presence of a participation externality

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  • Griffy, Benjamin
  • Masters, Adrian

Abstract

A participation externality occurs when vacancy creation depends on workforce composition. As marginal workers enter the labor market, they lower the average quality of the workforce. This suppresses vacancy creation but is not internalized by the new entrants. This paper studies how this externality interacts with search externalities and the efficacy of policies at addressing it. These externalities interact because either party may retain an inefficient share of the surplus and workforce composition affects the expected surplus. We show that when chosen optimally, minimum wages and unemployment insurance partially address both externalities, but minimum wages primarily affect participation, while unemployment insurance primarily affects search externalities.

Suggested Citation

  • Griffy, Benjamin & Masters, Adrian, 2022. "Labor market policy in the presence of a participation externality," European Economic Review, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:eecrev:v:144:y:2022:i:c:s0014292122000320
    DOI: 10.1016/j.euroecorev.2022.104081
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    References listed on IDEAS

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    Cited by:

    1. Peltonen, Juho, 2023. "On the efficiency of labor markets with short-time work policies," MPRA Paper 119165, University Library of Munich, Germany.
    2. Goensch, Johannes & Gulyas, Andreas & Kospentaris, Ioannis, 2024. "Worker mobility and UI extensions," European Economic Review, Elsevier, vol. 162(C).

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    More about this item

    Keywords

    Minimum wage; Unemployment insurance; Search and matching; Labor market participation; Optimal policy;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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