Encouraging Participation in a Labor Market with Search and Matching Frictions

Alon Binyamini () and Tali Larom ()
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Alon Binyamini: Bank of Israel
Tali Larom: Tel Aviv University

No 2012.11, Bank of Israel Working Papers from Bank of Israel

Abstract: We analyze the transition of the labor market to a new steady state following a reduction of negative incentives for participation. Due to labor market search and matching frictions, the transition may temporarily increase unemployment while new participants search for jobs. The formal framework is a dynamic search and matching model with an endogenous participation decision and unemployment benets that are not conditioned on search eâ„ort (in other words, non-participants are also entitled to unemployment benets). We employ the model to explore the mechanisms at work, and their welfare implications, following a reduction of unemployment benets. We show that, although social welfare may be higher in the new equilibrium, the transition period involves a temporary welfare loss. We consider two alternative policy approaches: a gradual reduction versus an immediate one. We conclude that the transition period associated with a gradual reduction involves a smaller welfare loss.

Keywords: endogenous participation; search and matching frictions; unemployment (search for similar items in EconPapers)
JEL-codes: E24 J21 J64 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012-07
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