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Social Preferences and Labor Market Policy

  • Trine Filges
  • John Kennes

    ()

    (Institute of Economics University of Copenhagen)

  • Torban Tranaes

We find that the main featues of labor policy across OECD countries can be explained by an equilibrium search model with risk neutral agents and a government that chooses policy to maximize a social welfare function. Optimal policy redistributes income from advantaged to disadvantaged workers. A worker can be disadvantaged in one of two possible ways - they may have less ability to aquire and utilize skills in the workplace or they may have less ability to enjoy leaisure (i.e. home production). The government does not directly observe these attributes, but must infer them from labor market outcomes. The optimal policy is a solution to an incentive compatibility problem, because each worker has some influence over their labor market state. The model explains why passive benefits tend to fall and active benefits tend to increase durng the course of unemployment spell. The model also explains why countries that appear to pursue equity spend more on both active and passive labor market programs.

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 562.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:562
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  1. Michael Kiley, 2002. "How Should Unemployment Benefits Respond to the Business Cycle?," Computing in Economics and Finance 2002 167, Society for Computational Economics.
  2. Pavoni, Nicola & Violante, Giovanni L, 2006. "Optimal Welfare-to-Work Programs," CEPR Discussion Papers 5937, C.E.P.R. Discussion Papers.
  3. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  4. Benoit Julien & John Kennes & Ian King, 2000. "Bidding for Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 619-649, October.
  5. Peter Fredriksson & Bertil Holmlund, 2006. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 357-386, 07.
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