Optimal Unemployment Insurance in a Matching Equilibrium

Abstract

This paper considers the optimal design of unemployment insurance (UI) within an equilibrium matching framework when wages are determined by strategic bargaining. Unlike the Nash bargaining approach, reducing UI payments with duration is welfare increasing. A co-ordinated policy approach, however, one that chooses job creation subsidies and UI optimally, implies a much greater welfare gain than one which considers optimal UI alone. Once job creation subsidies are chosen optimally, the welfare value of making UI payments duration dependent is small. JEL Classification: H21, J41

Does bargaining matter in the small firms matching model?

“…However, assuming risk aversion is more adapted to our model and is of particular relevance when dealing with e.g. optimal unemployment insurance policy (see for example Fredriksson andHolmlund, 2001 or Coles andMasters, 2006). In addition and as shown by Burdett and Wright (1998), it should be kept in mind that two-sided search with non-transferable or partially transferable utility may lead to multiple equilibria.…”

Optimal unemployment policy in a matching equilibrium

“…Equilibrium matching with Rubinstein-type wage bargaining, where the negotiated wage depends on the unemployed worker's entitlement to receive further unemployment benefits, yields a much less tractable framework (e.g. Coles and Masters, 2006).…”

“…Burdett and Mortensen, 1998) and when wages are determined by bilateral bargaining (e.g. Millard and Mortensen, 1997;Davidson and Woodbury, 1997;Cahuc and Lehmann, 2000;Fredriksson and Holmlund, 2001;Coles and Masters, 2006). (ii) A policy which maximises the welfare of the employed ignores the welfare of the unemployed.…”

Employment Subsidies and Substitutable Skills: An Equilibrium Matching Approach

“…Fredriksson andHolmlund 2001, or Albrecht andVroman 2005), we assume that the fall from the 'high' to the 'low' benefit occurs at a Poisson rate. Compared to a flat rate, time-varying unemployment benefits have different effects on job-search and on the wage bargain (Cahuc and Lehmann 2000, Fredriksson and Holmlund 2001, and Coles and Masters 2006. Second, we add short-duration active labor market programs (counseling, job clubs, among others) that enhance the matching effectiveness of the participants.…”