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Optimal unemployment policy in a matching equilibrium

  • Coles, Melvyn

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.

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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 15 (2008)
Issue (Month): 4 (August)
Pages: 537-559

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Handle: RePEc:eee:labeco:v:15:y:2008:i:4:p:537-559
Contact details of provider: Web page: http://www.elsevier.com/locate/labeco

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  1. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June.
  2. Fredriksson, Peter & Holmlund, Bertil, 1998. "Optimal Unemployment Insurance in Search Equilibrium," Working Paper Series 1998:2, Uppsala University, Department of Economics.
  3. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 1-21, January.
  4. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September.
  5. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2a, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Alp Atakan, 2005. "Assortative Matching with Explicit Search Costs," 2005 Meeting Papers 218, Society for Economic Dynamics.
  7. Marimon, Ramon & Zilibotti, Fabrizio, 1999. "Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits," Economic Journal, Royal Economic Society, vol. 109(455), pages 266-91, April.
  8. repec:cup:cbooks:9780521337465 is not listed on IDEAS
  9. Davidson, Carl & Woodbury, Stephen A., 1997. "Optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 64(3), pages 359-387, June.
  10. repec:cup:cbooks:9780521331586 is not listed on IDEAS
  11. Acemoglu, Daron, 1997. "Training and Innovation in an Imperfect Labour Market," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 445-64, July.
  12. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  13. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  14. Adrian Masters & Melvyn Coles, 2004. "Optimal Unemployment Insurance in a Matching Equilibrium," Discussion Papers 04-12, University at Albany, SUNY, Department of Economics.
  15. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  16. Narayana Kocherlakota, 2004. "Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 541-554, July.
  17. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July.
  18. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  19. 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.
  20. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  21. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
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