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Unemployment Compensation Finance and Labor Market Rigidity

  • Cahuc, Pierre


    (Ecole Polytechnique, Paris)

  • Malherbet, Franck


    (University of Rouen)

The systematic use of experience rating is an original feature of the U.S. unemployment benefit system. In most states, unemployment benefits are financed by taxing firms in proportion to their separations. Experience rating is a way to require employers to contribute to the payment of unemployment benefits they create through their firing decisions. It is striking that experience rating is absent from the unemployment compensation systems of other OECD countries, where benefits are usually financed by taxes on payrolls, paid by employers or employees, and by government contributions (Holmlund, 1998). Is experience rating only adapted to the U.S. labor market? Would it be suitable in other countries? At first glance, it is likely that experience rating is not desirable in many European labor markets characterized by high firing costs. We provide a simple matching model of a rigid labor market including firing costs, temporary jobs and a minimum wage in order to analyze the issue. Our analysis leads us to argue that experience rating is likely to reduce unemployment and to improve the welfare of low skilled workers in France, and more generally for low skilled workers in a typical rigid Continental European labor market.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 581.

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Length: 28 pages
Date of creation: Sep 2002
Date of revision:
Publication status: published in: Journal of Public Economics, 2004, 88 (3-4), 481-501
Handle: RePEc:iza:izadps:dp581
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  1. Cahuc, Pierre & Postel-Vinay, Fabien, 2002. "Temporary jobs, employment protection and labor market performance," Labour Economics, Elsevier, vol. 9(1), pages 63-91, February.
  2. Marceau, Nicolas, 1993. "Unemployment insurance and market structure," Journal of Public Economics, Elsevier, vol. 52(2), pages 237-249, September.
  3. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
  4. Holmlund, Bertil, 1998. " Unemployment Insurance in Theory and Practice," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 113-41, March.
  5. Patricia M. Anderson & Bruce D. Meyer, 1994. "The Effects of Unemployment Insurance Taxes and Benefits on Layoffs Using Firm and Individual Data," NBER Working Papers 4960, National Bureau of Economic Research, Inc.
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  7. Cahuc, Pierre & Zylberberg, Andre, 1999. "Job Protection, Minimum Wage and Unemployment," IZA Discussion Papers 95, Institute for the Study of Labor (IZA).
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  9. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
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  14. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
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  16. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  17. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October.
  18. Topel, Robert H, 1983. "On Layoffs and Unemployment Insurance," American Economic Review, American Economic Association, vol. 73(4), pages 541-59, September.
  19. Farber, Henry S., 1999. "Mobility and stability: The dynamics of job change in labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 37, pages 2439-2483 Elsevier.
  20. 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.
  21. Deere, Donald R, 1991. "Unemployment Insurance and Employment," Journal of Labor Economics, University of Chicago Press, vol. 9(4), pages 307-24, October.
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