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Optimal Earnings-Related Unemployment Benefits

  • Taslimi, Mohammad

    ()

    (Department of Economics)

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    Existing unemployment insurance systems in many OECD countries involve a ceiling on insurable earnings. The result is lower replacement rate for employees with relatively high earnings. This paper examines whether replacement rates should decrease as the level of earnings rises. The framework is a search equilibrium model where wages are determined by Nash bargaining between firms and workers, job search intensity is endogenous and workers are heterogeneous. The analysis suggests higher replacement rates for low-paid workers if taxes are uniform. The same result may hold when taxes are redistributive. Numerical simulations indicate that there are modest welfare gains associated with moving from an optimal uniform benefit system to an optimally differentiated one in both cases, i.e., uniform and redistributive taxation. The case for differentiation arises from the fact that it may have favourable effects on the tax base.

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    Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2003:16.

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    Length: 30 pages
    Date of creation: 10 Apr 2003
    Date of revision:
    Handle: RePEc:hhs:uunewp:2003_016
    Contact details of provider: Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
    Phone: + 46 18 471 25 00
    Fax: + 46 18 471 14 78
    Web page: http://www.nek.uu.se/
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    1. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," Papers 1997-25, Uppsala - Working Paper Series.
    2. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
    3. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
    4. Johnson, G.E. & Layard, P.R.G., 1987. "The natural rate of unemployment: Explanation and policy," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 16, pages 921-999 Elsevier.
    5. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
    6. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    7. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    8. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    9. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
    10. Freeman, Richard B., 1998. "War of the models: Which labour market institutions for the 21st century?1," Labour Economics, Elsevier, vol. 5(1), pages 1-24, March.
    11. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
    12. Aino Salom�ki & Teresa Munzi, 1999. "Net Replacement Rates of the Unemployed. Comparison of various approaches," European Economy - Economic Papers 133, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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