Unemployment Insurance and Optimal Taxation in a Search Model of the Labor Market

Athanasios Geromichalos

Review of Economic Dynamics, 2015, vol. 18, issue 2, 365-380

Abstract: In many search models of the labor market, unemployment insurance (UI) is conveniently interpreted as the value of leisure or home production and is, therefore, treated as a parameter. However, in reality, UI has to be funded through taxation that might be distortionary. In this paper, I analyze the welfare implications of raising funds towards UI benefits through different taxation systems within a directed search model. Since firms "direct" workers to apply to them by posting wages, raising UI funds in a lump-sum manner always distorts the efficient allocation, as it gives firms an incentive to be excessively aggressive in their attempt to maximize the probability of filling up their vacancies. I discuss two ways through which this externality can be internalized and efficiency can be restored. (Copyright: Elsevier)

Keywords: Directed search; Unemployment insurance; Optimal taxation (search for similar items in EconPapers)
JEL-codes: C78 E24 J65 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Online Appendix to "Unemployment Insurance and Optimal Taxation in a Search Model of the Labor Market" (2014)
Working Paper: Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market (2012)
Working Paper: Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market (2012)
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DOI: 10.1016/j.red.2014.07.002

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