Optimal Labor-Market Policy in Recessions

Philip Jung () and Keith Kuester

American Economic Journal: Macroeconomics, 2015, vol. 7, issue 2, 124-56

Abstract: Within a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort, we show how to decentralize the constrained-efficient allocation by a combination of a production tax and three labor-market policy instruments: vacancy subsidies, layoff taxes, and unemployment benefits. We derive analytical expressions for the optimal mix of these over the business cycle. Calibrating the model to the US economy under the assumption that wages are rigid, we find that hiring subsidies and layoff taxes should rise considerably and persistently in recessions. The optimal variation in unemployment benefits, in contrast, is quantitatively small and short-lived. (JEL E24, E32, J24, J63, J64, J65)

JEL-codes: E24 E32 J24 J63 J64 J65 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mac.20130028
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Citations: View citations in EconPapers (68)

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Related works:
Working Paper: Optimal Labor-Market Policy in Recessions (2012)
Working Paper: Optimal labor-market policy in recessions (2011)
Working Paper: Optimal Labor-Market Policy in Recessions (2011)
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