Optimal Labor-Market Policy in Recessions

Keith Kuester and Philip Jung ()

No 186, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort we first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. We derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Our propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. We find this confirmed in a calibration targeted to the U.S. economy.

Date: 2012
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: Optimal Labor-Market Policy in Recessions (2015)
Working Paper: Optimal labor-market policy in recessions (2011)
Working Paper: Optimal Labor-Market Policy in Recessions (2011)
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