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Labor market policy in the presence of a participation externality

Benjamin Griffy and Adrian Masters

European Economic Review, 2022, vol. 144, issue C

Abstract: A participation externality occurs when vacancy creation depends on workforce composition. As marginal workers enter the labor market, they lower the average quality of the workforce. This suppresses vacancy creation but is not internalized by the new entrants. This paper studies how this externality interacts with search externalities and the efficacy of policies at addressing it. These externalities interact because either party may retain an inefficient share of the surplus and workforce composition affects the expected surplus. We show that when chosen optimally, minimum wages and unemployment insurance partially address both externalities, but minimum wages primarily affect participation, while unemployment insurance primarily affects search externalities.

Keywords: Minimum wage; Unemployment insurance; Search and matching; Labor market participation; Optimal policy (search for similar items in EconPapers)
JEL-codes: E24 E64 J64 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:144:y:2022:i:c:s0014292122000320

DOI: 10.1016/j.euroecorev.2022.104081

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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