Optimal unemployment benefit policy and the firm productivity distribution

This paper provides a novel justification for a declining time profile of unemployment benefits that does not rely on moral-hazard or consumption-smoothing considerations. We consider a simple search environment with homogeneous workers and low- and high-productivity firms. By introducing a declinin...

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Bibliographic Details
Published in:International tax and public finance 2017-02, Vol.24 (1), p.36-59
Main Authors: Blumkin, Tomer, Danziger, Leif, Yashiv, Eran
Format: Article
Language:English
Subjects:
Business Taxation/Tax Law
Economic models
Economic theory
Economics
Economics and Finance
Employment
Equilibrium
Externality
Labor market
Moral hazard
Productivity
Public Finance
Skewness
Studies
Unemployment
Unemployment benefits
Wages & salaries
Workers
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Summary:This paper provides a novel justification for a declining time profile of unemployment benefits that does not rely on moral-hazard or consumption-smoothing considerations. We consider a simple search environment with homogeneous workers and low- and high-productivity firms. By introducing a declining time profile of benefits, the government can affect the equilibrium wage profile in a manner that enhances the sorting of workers across low- and high-productivity firms. We demonstrate that optimal government policy depends on the dispersion and skewness of the firms’ productivity distribution.
ISSN:0927-5940
1573-6970
DOI:10.1007/s10797-016-9408-1