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Temporary Layoffs and Unemployment Insurance: Is Experience Rating Desirable?

  • Julia Fath
  • Clemens Fuest

This paper explores how the introduction of an experience rated system of unemployment insurance affects employment and welfare in a model where implicit contracts between firms and workers give rise to wage rigidities and unemployment. In the literature, it has been argued that experience rated systems of unemployment insurance may reduce long term employment as firms anticipate the higher costs of layoffs implied by experience rating. Our analysis shows that, despite the higher costs of layoffs, the introduction of experience rating may increase long term employment. Moreover, it unambiguously increases welfare.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-02/cesifo_wp663.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 663.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_663
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  1. Holmlund, Bertil, 1997. "Unemployment Insurance in Theory and Practice," Working Paper Series 1997:25, Uppsala University, Department of Economics.
  2. Burda, Michael C, 1992. " A Note on Firing Costs and Severance Benefits in Equilibrium Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(3), pages 479-89.
  3. Julia Fath & Clemens Fuest, 2005. "Experience Rating versus Employment Protection Laws in a Model where Firms Monitor Workers," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 299-314, 06.
  4. Ljungqvist, Lars, 2001. "How Do Layoff Costs Affect Employment?," CEPR Discussion Papers 3051, C.E.P.R. Discussion Papers.
  5. Burdett, Kenneth & Wright, Randall, 1989. "Optimal firm size, taxes, and unemployment," Journal of Public Economics, Elsevier, vol. 39(3), pages 275-287, August.
  6. John T. Addison & Paulino Teixeira, 2003. "The Economics of Employment Protection," Journal of Labor Research, Transaction Publishers, vol. 24(1), pages 85-129, January.
  7. Ljungqvist, Lars, 2001. "How Do Layoff Costs Affect Employment?," IZA Discussion Papers 403, Institute for the Study of Labor (IZA).
  8. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  9. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Wiley Blackwell, vol. 47(2), pages 321-38, January.
  10. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1479-96, December.
  11. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
  12. Feldstein, Martin S, 1978. "The Effect of Unemployment Insurance on Temporary Layoff Unemployment," American Economic Review, American Economic Association, vol. 68(5), pages 834-46, December.
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