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Optimal Unemployment Insurance for Older Workers

Author

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  • Jean-Olivier Hairault

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, IZA - Institute for the Study of Labor)

  • François Langot

    (IZA - Institute for the Study of Labor, GAINS-TEPP - UM - Le Mans Université, CEPREMAP - Centre pour la recherche économique et ses applications)

  • Sébastien Ménard

    (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université)

  • Thepthida Sopraseuth

    (CEPREMAP - Centre pour la recherche économique et ses applications, GAINS-TEPP - UM - Le Mans Université)

Abstract

This paper studies the optimal unemployment insurance for older workers in a repeated principal-agent model, where the search intensity of risk-averse workers (the agents) is not observed by the risk-neutral insurance agency (the principal). When unemployment benefits are the only available tool, the insurance agency is not able to induce older workers to search for a job. This is because of the short time-horizon of workers close to retirement. We propose to introduce a pension tax dependent on the length of the unemployment spell. We show that this device performs better than a wage tax after re-employment. First, it makes jobs more attractive, as they are free of tax. Second, because re-employment will be short-lived, a pension tax is a more powerful incentive than a wage tax, and provides more substantial fiscal gains to the agency. Finally, a pension tax allows those workers near retirement who still do not exercise job search to smooth their consumption during their unemployment spell, as if they could borrow against their future pension.

Suggested Citation

  • Jean-Olivier Hairault & François Langot & Sébastien Ménard & Thepthida Sopraseuth, 2012. "Optimal Unemployment Insurance for Older Workers," PSE - Labex "OSE-Ouvrir la Science Economique" hal-00668989, HAL.
  • Handle: RePEc:hal:pseose:hal-00668989 DOI: 10.1016/j.jpubeco.2012.02.002 Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00668989
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. J. García-Pérez & Alfonso Sánchez-Martín, 2015. "Fostering job search among older workers: the case for pension reform," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-34, December.
    2. García-Pérez, J. Ignacio & Jiménez-Martín, Sergi & Sánchez-Martín, Alfonso R., 2013. "Retirement incentives, individual heterogeneity and labor transitions of employed and unemployed workers," Labour Economics, Elsevier, vol. 20(C), pages 106-120.
    3. Sarah Le Duigou & Pierre-Jean Messe, 2017. "Pension reforms, older workers' employment and the role of job separation and finding rates in France," TEPP Working Paper 2017-10, TEPP.
    4. Arnaud Chéron & Jean-Olivier Hairault & François Langot, 2013. "Life-Cycle Equilibrium Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 31(4), pages 843-882.
    5. Parsons, Donald O., 2014. "Job Displacement Insurance: An Overview," IZA Discussion Papers 8223, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Unemployment insurance; Retirement; Recursive contracts; Moral hazard;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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