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Optimal labor market policy with search frictions and risk-averse workers

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  • Jean-Baptiste Michau

    (Department of Economics, Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper characterizes the optimal policy within a dynamic search model of the labor market with risk-averse workers. In a fi rst-best allocation of resources, unemployment benefi ts should provide perfect insurance against the unemployment risk, layoff taxes are necessary to induce employers to internalize the cost of dismissing an employee but should not be too high in order to allow a desirable reallocation of workers from low to high productivity jobs, hiring subsidies are needed to partially offset the adverse impact of layoff taxes on job creation and payroll taxes should be approximately equal to zero. I obtain an optimal rate of unemployment which is, in general, different from the output maximizing rate of unemployment. When workers have some bargaining power, which prevents the provision of full insurance, it is optimal to reduce the rate of job creation below the output maximizing level in order to lower wages and increase the level of unemployment benefi ts. Thus, layoff taxes should typically exceed hiring subsidies which generates enough surplus to nance at least some of the unemployment bene ts. The inclusion of moral hazard does not change this conclusion, unless workers have low bargaining power.

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  • Jean-Baptiste Michau, 2012. "Optimal labor market policy with search frictions and risk-averse workers," Working Papers hal-00757173, HAL.
  • Handle: RePEc:hal:wpaper:hal-00757173
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00757173
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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. Saint-Paul, Gilles, 2015. "Can active labor market policy be counter-productive?," Research in Economics, Elsevier, vol. 69(1), pages 26-36.
    3. Philip Schuster, 2010. "Labor Market Policy Instruments and the Role of Economic Turbulence," University of St. Gallen Department of Economics working paper series 2010 2010-29, Department of Economics, University of St. Gallen.
    4. Schuster, Philip, 2012. "Employment Protection, Labor Market Turnover, and the Effects of Globalization," Economics Series 288, Institute for Advanced Studies.
    5. Stefan Boeters, 2016. "Age-Specific Labour Market Effects of Employment Protection: A Numerical Approach," Computational Economics, Springer;Society for Computational Economics, vol. 48(2), pages 281-305, August.

    More about this item

    Keywords

    Employment protection; Hiring subsidies; Optimal ratof unemployment; Unemployment insurance;

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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