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Encouraging Participation in a Labor Market with Search and Matching Frictions

Author

Listed:
  • Alon Binyamini

    (Bank of Israel)

  • Tali Larom

    (Tel Aviv University)

Abstract

We analyze the transition of the labor market to a new steady state following a reduction of negative incentives for participation. Due to labor market search and matching frictions, the transition may temporarily increase unemployment while new participants search for jobs. The formal framework is a dynamic search and matching model with an endogenous participation decision and unemployment benets that are not conditioned on search eâ„ort (in other words, non-participants are also entitled to unemployment benets). We employ the model to explore the mechanisms at work, and their welfare implications, following a reduction of unemployment benets. We show that, although social welfare may be higher in the new equilibrium, the transition period involves a temporary welfare loss. We consider two alternative policy approaches: a gradual reduction versus an immediate one. We conclude that the transition period associated with a gradual reduction involves a smaller welfare loss.

Suggested Citation

  • Alon Binyamini & Tali Larom, 2012. "Encouraging Participation in a Labor Market with Search and Matching Frictions," Bank of Israel Working Papers 2012.11, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2012.11
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    endogenous participation; search and matching frictions; unemployment;
    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
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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