Unemployment Insurance and Labor Reallocation

Franck Malherbet and Mustafa Ulus ()

No 2003-17, Working Papers from Center for Research in Economics and Statistics

Abstract: In this paper, an equilibrium search-and-matching model of a segmented labormarket has been developed to assess the effects of unemployment insuranceand its financing on labor allocation across heterogeneous economic sectors (industries).Heterogeneity stems from different rates of labor turnover and levelsof productivity. The model has been applied to Turkey, which is currently introducingan unemployment insurance system. The results can be extended toa wide range of countries however. Our analysis leads us to argue that with apayroll taxation system, more generous unemployment payments increase theimplicit subsidy to volatile sectors, which in turn leads a flow of workers to thesesectors. Conversely, a switch from a payroll tax system to an experience-ratedsystem makes it possible to reduce the implicit lay-off subsidy. This in turn stabilizesemployment by reducing the size of the volatile sectors. Furthermore, ithas been proved that experience rating has a non-trivial effect on total output.

Date: 2003
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