Higher Unemployment Benefits Research Articles

Labor Market Rigidities and the Political Economy of Trade Protection

Labor market rigidities are commonly believed to be a major reason for imposing trade impediments. In this paper, I introduce labor market rigidities (such as influential trade unions and high unemployment benefits), that are prevalent in continental European countries, into the well-known Grossman and Helpman (1994) protection for sale model, which has emerged as the leading model in the political economy of trade protection literature. I show that contrary to commonly held views, these labor market rigidities do not necessarily increase equilibrium trade protection. A testable equilibrium trade protection equation is also derived. The findings in this paper are hence particularly relevant for empirical tests of trade policy determinants in economies with more regulated labor markets.

Gross Job Flows and Institutions in Europe

We examine job flows in the 1990s for a sample of 13 European countries. By using a dataset of continuing firms that covers all sectors, we find firm characteristics to be important determinants of job flows, with smaller and younger firms within services typically having a larger degree of job turnover. Once controlled for firm and sectoral effects, the role of institutions in the dynamics of job creation and destruction is examined. As expected, employment protection is found to reduce job flows. Similarly, countries with higher unemployment benefits and more coordinated wage bargaining systems are characterised by lower job flows. JEL Classification: J23, J60

Turbulence and Unemployment in a Job Matching Model

According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs due to high unemployment benefits. In this Paper, we reassess the turbulence unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers.

The Macroeconomics of Happiness

We show that macroeconomic movements have strong effects on the happiness of nations. First, we find that there are clear microeconomic patterns in the psychological well-being levels of a quarter of a million randomly sampled Europeans and Americans from the 1970s to the 1990s. Happiness equations are monotonically increasing in income, and have similar structure in different countries. Second, movements in reported well-being are correlated with changes in macroeconomic variables such as gross domestic product. This holds true after controlling for the personal characteristics of respondents, country fixed effects, year dummies, and country-specific time trends. Third, the paper establishes that recessions create psychic losses that extend beyond the fall in GDP and rise in the number of people unemployed. These losses are large. Fourth, the welfare state appears to be a compensating force: higher unemployment benefits are associated with higher national well-being.

Optimal unemployment insurance: transitional dynamics vs. steady state

In this study, we ask whether the presence of precautionary savings substantially reduces the optimal replacement rate in an European economy type characterized by high unemployment benefits and moral hazard. We build a simple job search model calibrated on French data and, in line with previous studies, find that the optimality criterion based on comparisons of steady states leads to a low optimal ratio. Yet, this result ignores potential transitional costs due to the necessity for agents to increase their savings and reduce their consumption whenever the ratio is cut. We therefore build a dynamic model taking full account of the transition, and show that a reduction in benefits reduces welfare. Even though the long-run optimal replacement rate is lower than the current one, transitional costs dominate long-run gains.

Protecting Against Labour Market Risk: Employment Protection or Unemployment Benefits?

We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labour market risk. The mix of quantity restrictions and price regulations adopted by the various countries would seem to correspond to a stable politico-economic equilibrium. We develop a model in which voters are required to cast a ballot over the strictness of EPL and over the generosity of UB. Agents are heterogeneous along two dimensions: employment status - there are insiders and outsiders - and skills - low and high skills. We show that if there exists a majority of low-skill insiders, the voting game has a politico-economic equilibrium with low UB and high EPL; otherwise, the equilibrium features high UB and low EPL. Another testable implication of the model is that a larger share of elderly workers increases the demand for EPL. Panel data on institutions and on the age and educational structures of the populations are broadly in line with our results. We also find that those favouring EPL over UB in a public opinion poll carried in 2001 in Italy have precisely the same characteristics predicted by our model.

The beneficial effects of generous unemployment benefits on profits and employment

Theories of the labor market generally predict that high unemployment benefits put upward pressure on wages, thus diminishing the profitability of employing labor and exacerbating unemployment. It remains to be explained why firms agree to contribute to generous schemes (replacement rates for general schemes in Europe and US are in the range 50–85%) that they are often willing to supplement (with sector- or firm-specific schemes that may involve even 100% replacement and long benefit duration). An answer can be found by including in the shirking–efficiency wage model, the hypotheses that workers are risk-averse and that those discharged for misconduct are not eligible to benefits. It is then optimal for risk-neutral firms (and for employment) to introduce an insurance scheme with full income coverage and with a duration limited only by the workers' participation constraint (there is no trade-off between level and duration of benefits). The more difficult it is to detect and fire shirkers, the higher is the rent workers enjoy above the competitive wage and the longer is the benefit duration consistent with the participation constraint. This result can be interpreted as a complementarity between the strictness of employment protection legislation (EPL) and the duration of benefits, which seems to conform with broad patterns observed in primary vs. secondary employment and in continental Europe vs. Anglo-Saxon countries.

The Macroeconomics Of Happiness

This paper shows that macroeconomic movements have strong effects on the happiness of nations. First, we find that there are clear microeconomic patterns in the psychological well-being levels of a quarter of a million randomly sampled Europeans and Americans from the 1970's to the 1990's. Happiness equations are monotonically increasing in income, and have a similar structure in different countries. Second, movements in reported well-being are correlated with changes in macroeconomic variables such as Gross Domestic Product. This holds true after controlling for the personal characteristics of respondents, country fixed-effects, year dummies, and country-specific time trends. Third, the paper establishes that recessions create psychic losses that extend beyond the fall in GDP and rise in the number of people unemployed. These losses are large. Fourth, the welfare state appears to be a compensating force: higher unemployment benefits are associated with higher national well-being.

Semi-Nonparametric Estimation of an Equilibrium Search Model

We specify and estimate an equilibrium job search model with productivity differences across labour market segments. The model allows for two types of unemployment: frictional unemployment due to search frictions and structural unemployment due to wage floors. Wage floors exist because of high unemployment benefits or binding minimum wages. The productivity distribution is estimated semi-nonparametrically along the lines of Gallant-Nychka, using Hermite series approximation. We decompose the total unemployment rate and we examine the effects of changes in the minimum wage.

Unemployment Benefits and Redistributive Taxation in the Presence of Labor Quality Externalities

In this paper, a worker's productivity is assumed to depend on his own quality and on the average quality of other employed workers. In this setting, unemployment benefits that induce low quality workers to leave the labor force have important efficiency as well as equity implications. In addition to unemployment benefits, the authorities can use a proportional income tax and lump sum transfers. The desirability of tax and transfer policy is considered from the perspectives of a utilitarian social planner and of an electorate consisting of employed and unemployed workers. Employed workers may be in favor of unemployment benefits, even though they do not benefit directly. If unemployment benefits are financed by lump sum taxes, then relatively high unemployment benefits may be favored by a coalition of the unemployed and of high quality employed workers.

Infant mortality, public policy and inequality – a comparison of 18 industrialised countries 1950–85

AbstractUsing new comparative data bases this paper examines whether infant mortality rates in industrialised nations are affected by public policies and income inequality. Particular attention is given to the role of the level of economic development, public policy and the distribution of economic resources. The study shows that the level of economic development has a strong, but decreasing impact on the infant mortality rate. Income inequality and relative poverty rates appear to be of greater importance for the variation in infant mortality rates than the level of economic development between rich countries. Levels of unemployment and of social security benefits seems to affect the infant mortality rate; the combination of high unemployment and low unemployment benefits seems to be associated with particularly high mortality rates. A high level of family benefits is also associated with low infant mortality rates.

Post‐unemployment wages, the probability of re‐employment, and the unemployment benefit

This paper presents empirical evidence on the effect of the unemployment benefit on post‐unemployment wages, the likelihood of re‐employment and reservation wages of unemployed job seekers in New Zealand. A specially designed survey and the resulting panel data utilised in the study, allow the first test of unemployment job matching hypotheses with New Zealand data. The question of the effect of the unemployment benefit on job search outcome remains generally unresolved in the empirical job search literature. The New Zealand case studied alleviates some measurement problems in earlier studies, especially those employing U.S. data (as noted in Welch, 1977; and Feldstein, 1978) in that the benefit level is not tied to a job seeker's previous wage, and that it is not experience rated, presenting favourable measurement conditions. The results indicate that a higher unemployment benefit replacement ratio was associated with a lower probability of re‐employment, but a higher post‐unemployment wage, mainly throu...

A Model of Regional Contraction and Unemployment

A two-region economy is studied in which one region has a competitive labor market whereas the other has a congested labor market in which locating a job uses resources. Workers loosing jobs in the congested region choose between migration followed by an immediate job offer and searching in the congested region. Steady-state decline of the labor force in the congested region is characterized together with equilibrium unemployment rates. Higher unemployment benefits may increase the rate of contraction of the congested market if the consequence for job matching outweighs that for migration conditional upon a given level of unemployment. Copyright 1992 by Royal Economic Society.

Labor supply, unemployment benefits in an open economy model of interwar Britain

Abstract We estimate a labor supply function in an open economy setting for interwar Britain. The results are generally negative. This suggests that high unemployment benefits did not work directly on shifting labor supply in a market clearing model.

Unemployment in Interwar Britain

In a recent article two American authors, Benjamin and Kochin (1979a), argide that Keynes was wrong in attributing much of abnormally high unemployment of interwar years to a deficiency of aggregate demand. They claim to have discovered alternative clue to riddle of high unemployment in interwar and to be able to show that the persistently high rate of unemployment in interwar Britain was due in large part not to deficient aggregate demand but to high unemployment insurance benefits relative to wages (ibid., p. 474). of unemployed standing watch in Britain at publication of General Theory was largely a volunteer army (ibid.). In making their case, Benjamin and Kochin present three sets of evidence. The first is a regression of unemployment on a measure of benefits-to-wages ratio, so-called replacement ratio, and on a measure of deviations of output from trend over period 1920-38. The second set of evidence concerns implication of lower rate of unemployment among juveniles than among adults, and third set consists of inferences to be drawn from differences in rate of unemployment between single and married women, at different times. All bodies of evidence are used to support hypothesis of existence of an association between replacement ratio and level of unemployment; but only first, namely, time-series regression, is used to establish amount of unemployment to be explained in this way. That amount is seen to depend on specific values of coefficients on replacement term and on output term in regression. Table 1 reports data which are used by Benjamin and Kochin. The figures for output are for net national product (Q) as given by Feinstein (1972). For W, Benjamin and Kochin derive a figure for average weekly earnings from data for annual wage and salaries