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Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market

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  • Athanasios Geromichalos

    (Department of Economics, University of California Davis)

Abstract

In many search models of the labor market, unemployment insurance (UI) is conveniently interpreted as the value of leisure or home production and is, therefore, treated as a parameter. However, in reality, UI has to be funded through taxation that might be distortionary. In this paper, I analyze the welfare implications of different taxation systems within two equilibrium models of unemployment: random search and directed search. In a random search model without taxes, efficiency is typically not achieved, unless the so-called Hosios condition is satisfied. If the bargaining power of firms is large, a lump-sum tax can discourage firms from entering and improve welfare. In a directed search model without taxes, constrained efficiency is always achieved. Since firms ?direct? workers to apply to them by posting wages, raising UI funds in a lump-sum manner always distorts the efficient allocation, as it gives firms an incentive to be excessively aggressive in their attempt to maximize the probability of filing up their vacancies. I discuss two ways through which this externality can be internalized and efficiency can be re-established.

Suggested Citation

  • Athanasios Geromichalos, 2012. "Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market," Working Papers 174, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:174
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    References listed on IDEAS

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    Cited by:

    1. Jian Xin Heng & Benoit Julien & John Kennes & Ian King, 2016. "Job Qualities, Search Unemployment, and Public Policy," Discussion Papers Series 570, School of Economics, University of Queensland, Australia.
    2. Tobias Laun, 2020. "Optimal Social Insurance with Endogenous Health," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 464-493, April.
    3. Nicolas L. Jacquet & John Kennes & Serene Tan, 2019. "Wagevacancy contracts and multiplicity of equilibria in a directed search model of the labour market," Canadian Journal of Economics, Canadian Economics Association, vol. 52(2), pages 784-821, May.
    4. Benoit Julien & Ian King, "undated". "Quality Job Programs, Unemployment and the Job Quality Mix," MRG Discussion Paper Series 4621, School of Economics, University of Queensland, Australia.
    5. Uren, Lawrence, 2018. "The redistributive role of unemployment benefits," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 236-258.
    6. Guillaume Wilemme, 2021. "Optimal Taxation to Correct Job Mismatching," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 170-197, April.
    7. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.
    8. Jesper Bagger & Espen Moen & Rune Vejlin, 2018. "Optimal Taxation with On-the-Job Search," 2018 Meeting Papers 805, Society for Economic Dynamics.

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    More about this item

    Keywords

    Directed Search; Random Search; Unemployment Insurance; Optimal Taxation;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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