The Optimal Design of Unemployment Insurance and Employment Protection. A First Pass

Olivier Blanchard () and Jean Tirole

No 10443, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Much of the policy discussion of labor market institutions has been at the margin, with proposals to tighten unemployment benefits, reduce employment protection, and so on. There has been little discussion however of what the ultimate goal and architecture should be. The paper focuses on characterizing this ultimate goal, the optimal architecture of labor market institutions. We start our analysis with a simple benchmark, with risk averse workers, risk neutral firms and random shocks to productivity. In this benchmark, we show that optimality requires both unemployment insurance and employment protection---in the form of layoff taxes; it also requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and heterogeneity of firms or workers. We show how the architecture must be modified in each case. The scope for insurance may be more limited than in the benchmark; so may the scope for employment protection. The general principle remains however, namely the need to look at unemployment insurance and employment protection together, rather than in isolation.

JEL-codes: D60 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2004-04
Note: EFG ME PE
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