OPTIMAL LABOR-MARKET POLICY IN RECESSIONS (2011)
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BibTeX
@MISC{Jung11optimallabor-market,
author = {Philip Jung and Keith Kuester},
title = { OPTIMAL LABOR-MARKET POLICY IN RECESSIONS},
year = {2011}
}
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Abstract
We examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort we first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. We derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Our propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. We find this confirmed in a calibration targeted to the U.S. economy.
Keyphrases
optimal labor-market policy recession layoff tax business cycle unemployment insurance unemployment benefit optimal labor market-policy mix endogenous hiring production tax replacement rate optimal setting u.s. economy constrained-efficient allocation risk-averse worker steady state vacancy subsidy labor-market policy instrument derive analytical expression unobservable search effort
