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Optimal unemployment policy in a matching equilibrium

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  • Coles, Melvyn

Abstract

This paper considers optimal unemployment policy in a matching equilibrium with risk averse workers and unobserved job search effort. The Planner chooses unemployment benefits, taxes and job creation subsidies to maximise a Utilitarian welfare function. Optimal policy involves a trade-off between higher employment taxes (which finance more generous unemployment benefits) and greater market tightness (which reduces the average unemployment spell). Optimal UI implies the initial UI payment equals the wage, thus ensuring consumption is smooth across the job destruction shock, and UI payments then fall with duration.

Suggested Citation

  • Coles, Melvyn, 2008. "Optimal unemployment policy in a matching equilibrium," Labour Economics, Elsevier, vol. 15(4), pages 537-559, August.
  • Handle: RePEc:eee:labeco:v:15:y:2008:i:4:p:537-559
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mikko Moilanen, 2010. "Matching and settlement patterns: The case of Norway," Papers in Regional Science, Wiley Blackwell, vol. 89(3), pages 607-623, August.
    2. Luz Adriana Flórez, 2014. "The Efficiency of the Informal Sector on the Search and Matching Framework," Borradores de Economia 832, Banco de la Republica de Colombia.
    3. Luz Adriana Florez, 2015. "The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labour Market Policies," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, August.
    4. Fella Giulio & Tyson Christopher J., 2013. "Privately optimal severance pay," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-39, October.
    5. Nicholas Lawson, 2013. "Fiscal Externalities and Optimal Unemployment Insurance," AMSE Working Papers 1357, Aix-Marseille School of Economics, Marseille, France, revised 21 Nov 2013.
    6. Nicholas Lawson, 2013. "Fiscal Externalities and Optimal Unemployment Insurance," Working Papers halshs-00907807, HAL.

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