Optimal Labor-Market Policy in Recessions

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URL:	https://ub-madoc.bib.uni-mannheim.de/29630
URN:	urn:nbn:de:bsz:180-madoc-296303
Document Type:	Working paper
Year of publication:	2011
The title of a journal, publication series:	Working Paper Series
Volume:	11-1
Publication language:	English
Institution:	School of Law and Economics > VWL, insbes. Makroökonomik u. Wirtschaftspolitik (Krebs)
MADOC publication series:	Department of Economics > Working Paper Series
Subject:	330 Economics
Classification:	JEL: E32 , E24 , J64,
Keywords (English):	unemployment , search and matching , endogenous separations
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.