Endogenous Unemployment Benefits in an Equilibrium Job Search Model over the Life-Cycle

Abstract

By being indexed backwards on the wage, wage-indexed unemployment benefits have the particularity to grow over the workers' life cycle. In this paper we build an equilibrium job search model with the life cycle of workers to assess the effect of this shape of unemployment benefits taking into account this life cycle dimension. In this model, as workers' productivity tends to rise with age, the monopsony power that firms can exploit extends with age as well. This monopsony power is known to generate inefficient turnover and can be reduced by implementing unemployment benefits. As wage-indexed unemployment benefits (WIUB) grow over the workers' life cycle, despite their negative effect on employment already discussed by Burdett and Mortensen (1998) and ChA©ron and Langot (2010), WIUB can reduce the inefficient turnover all over the life cycle and be better suited to restore the efficient allocation on the labour market than Beveridgian unemployment benefits. Thanks to the simulation of the model, we find that in that case, the optimal unemployment benefits are wage-indexed at a replacement rate equal to 44%.