Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market

Athanasios Geromichalos

No 174, Working Papers from University of California, Davis, Department of Economics

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 different taxation systems within two equilibrium models of unemployment: random search and directed search. In a random search model without taxes, efficiency is typically not achieved, unless the so-called Hosios condition is satisfied. If the bargaining power of firms is large, a lump-sum tax can discourage firms from entering and improve welfare. In a directed search model without taxes, constrained efficiency is always achieved. 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 filing up their vacancies. I discuss two ways through which this externality can be internalized and efficiency can be re-established.

Keywords: Directed Search; Random Search; Unemployment Insurance; Optimal Taxation (search for similar items in EconPapers)
Pages: 30
Date: 2012-09-23
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https://repec.dss.ucdavis.edu/files/W5zXHTc6eA3dexAE5dLp57ue/12-18.pdf (application/pdf)

Related works:
Journal Article: Unemployment Insurance and Optimal Taxation in a Search Model of the Labor Market (2015)
Working Paper: Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market (2012)
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