Optimal labor-market policy in recessions

Philip Jung () and Keith Kuester

No 11-48, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The authors 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 they 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. The authors derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Their propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. The authors find this confirmed in a calibration targeted to the U.S. economy.

Keywords: Unemployment; Labor market; Business cycles (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Optimal Labor-Market Policy in Recessions (2015)
Working Paper: Optimal Labor-Market Policy in Recessions (2012)
Working Paper: Optimal Labor-Market Policy in Recessions (2011)
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