Optimal Labor-Market Policy in Recessions

Philip Jung (philip.jung@tu-dortmund.de) and Keith Kuester

No 11-1, Working Papers from University of Mannheim, Department of Economics

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.

Keywords: unemployment; search and matching; endogenous separations (search for similar items in EconPapers)
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Date: 2011
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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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Persistent link: https://EconPapers.repec.org/RePEc:mnh:wpaper:29630

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