UNEMPLOYMENT INSURANCE AND EXPERIENCE RATING: INSURANCE VERSUS EFFICIENCY*

Unemployment insurance (UI) distorts firms' layoff decisions by reducing the cost of laying off workers. To dampen this increase, it has been suggested that UI should be financed with an experience‐rated tax. Despite the fact that increasing the level of experience rating can reduce unemployment, it can reduce the insurance coverage workers receive. With high experience rating, firms may reduce their severance payments by more than the UI benefit. We build a model where competitive firms offer contracts with severance payments to risk‐averse workers. Frictions in the labor market lead to incomplete insurance. This article shows that less than full‐experience rating enables the government to increase the insurance coverage workers receive. Welfare implications are also investigated.     

Wage-shifting effects of severance payments savings accounts in Colombia

In 1990, Colombia replaced its traditional system of severance payments with a new system of severance payments savings accounts (SPSAs). Although severance payments are often justified on the grounds that they provide insurance against earnings loss, they also increase costs for employers and distort employment decisions. The extent of these distortions depends largely on how much of the costs of severance pay can be shifted from employers to workers. One reason why the effects of severance pay may not be completely shifted is that workers may fear the firm will “take the money and run” by declaring bankruptcy. A system of SPSAs eliminates this moral hazard problem, so it should facilitate the shifting of severance payments' costs to workers in the form of lower wages. Empirical results using the Colombian National Household Surveys (NHS) indicate that the introduction of SPSAs lowered wages by between 60% and 80% of total severance payment contributions. These results are consistent with increased shifting after SPSAs were introduced.     

Overcompensation by severance payments

An important aim of severance payments is to reduce the economic disadvantages of dismissed employees. However, it may well be the case that a considerable fraction of employees is actually better off, if they are re-employed shortly after their dismissal. This is the first attempt to estimate the relevance of overcompensation by severance payments. It is found that about 7% of dismissed employees or about one quarter of those with severance payments are overcompensated in Germany. In particular, employees with many years of tenure have chances to receive severance payments as well as wage increases in their new jobs subsequent to dismissal.     

Understanding the Determination of Severance Pay: Mandates,Bargaining, and Unions*

A substantial share of severance payments derives from private contracts or collective agreements. In this paper, we study the determination of these payments. We analyze joint bargaining over wages and severance payments in a search-and-matching model with risk-averse workers. Individual bargaining results in levels of severance pay that provide full insurance, but also depend on unemployment benefits and job-finding rates. Unions also choose full insurance. Because their higher wage demands reduce job creation, this requires higher severance pay. Severance pay observed in eight European countries, to which we calibrate the model, lies between predictions from the bargaining and union scenarios.     

Pareto-improving firing costs?

We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the ‘invisible handshake’) in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments.     

CHOOSY SEARCH AND THE MISMATCH OF TALENTS*

This article proposes a multi‐sector matching model where workers have (symmetric) sector‐specific skills and the search market is segmented by sector. Workers choose the range of markets they are willing to participate in. I identify a composition externality: Workers do not take into account the impact of their choice on sector‐specific mean productivity among the pools of job‐seekers. Consequently, workers prospect too many market segments, and there is room for public policy even when the so‐called Hosios condition holds.     

Constructing Social Citizenship: The Exclusion of African American Women from Unemployment Insurance in the US

Theories of dual social citizenship in the US welfare state postulate that two tiers of citizenship rights are defined by the state, with first-class citizenship status offered to some individuals (historically, white male industrial workers) and second-class rights to others. Unemployment insurance (UI), as an employment-based right, is often characterized as a first-tier right. However, this examination of the original UI law shows that many levels of stratification were incorporated within this one program. Workers of color were excluded from UI benefits under the agricultural exemption, and the exclusion of private domestic workers barred an additional three-fifths of African American women from receiving UI benefits. The UI system built on existing stratification in the labor market to restrict this new right of social citizenship, as policy-makers re-examined and reified overlapping hierarchies of race, gender, and class advantage.     

Social Security and Old Age Unemployment Risk with Efficient Wage Bargaining

I analyze a life‐cycle economy with old age productivity risk where wages, employment, and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Allocations with limited union membership are second‐best inefficient as they generate too little labor supply in young age, too much consumption before retirement, too little employment of older workers (early retirement), and too little insurance against old age unemployment. Providing public transfers to early retirees (disability benefits or early pensions) might help to increase the degree of risk sharing at the cost of lower old age employment. Depending on whether absolute risk aversion is increasing or decreasing in consumption, these policies might or might not produce efficiency gains at equilibrium.     

The Effects of Marginal Employment on Subsequent Labour Market Outcomes

Abstract. Unemployed workers in Austria do not lose their unemployment benefits (UI) if they work in a job where their earnings are below a certain threshold [‘marginal employment’ (ME)]. ME might improve their labour market status by signalling effort, or worsen it through reduced job‐search effort. Those who work in ME while claiming UI have less employment and lower earnings afterwards than those who do not. The penalty lessens over time but is still present after three years.     

On the welfare implications of firing costs

This is a paper on the theory of institutions. It provides a rationale for the presence of firing costs in OECD countries based on a market failure that takes the form of an externality. Workers have firm-specific and industry-specific skills, and in each period there is a nonzero probability that a worker quits. The quitting probability makes the private discount rate (used by firms in making decisions about firing workers) higher than the social discount rate. This generates a “quitting externality”, where firms lay off too many workers in a recession. Firms are too quick to dispose of their human capital in a cyclical downturn because it is of less value to them than it is to society. State-mandated redundancy payments become a second-best remedy to overcome the market failure.     

International Trade and Unemployment—the Worker‐selection Effect

This paper investigates the labor market effects of trade liberalization. We incorporate trade unions and heterogeneous workers into the Melitz framework. Workers differ with respect to their abilities. Our main findings are: (i) trade liberalization harms low‐ability workers, they lose their job and switch to long‐term unemployment (worker‐selection effect); (ii) high‐ability workers are better off in terms of both higher wages and higher employment; (iii) if a country is endowed with a large fraction of low‐ability workers, trade liberalization leads to a rise in aggregate unemployment—in this case, trade liberalization may harm a country's welfare; (iv) the overall employment and welfare effect crucially hinges on the characteristics of the wage bargain.     

The Austrian Severance Pay Reform: Toward a Funded Pension Pillar

With the beginning of 2003 a new severance pay scheme was introduced in Austria. The reform extends the coverage of the scheme to all employees, and moves it to full and enterprise external funding, but average payments will be lower than previously. This paper provides some evidence on two explicit aims of the reform, namely to generate more fairness in the distribution of severance payments among employees and the creation of a basis of the underdeveloped second pillar of the Austrian pension system. The empirical analysis based on a cross section of completed job spells of different durations indicates that differences in payments among groups will be stronger in the new scheme compared to the old system. Based on retirement income projections and simulations of a multi-pillar pension reform for the blue and white collar workers’ pension system, we conclude that, an increase of the contribution rate would be necessary to achieve a sufficient second pillar retirement income. Helpful comments by Milan Vodopivec and an anonymous referee are gratefully acknowledged.     

General training by firms, apprentice contracts, and public policy

Workers will not pay for general on-the-job training if contracts are not enforceable. Firms may if there are mobility frictions. Private information about worker productivities, however, prevents workers who quit receiving their marginal products elsewhere. Their new employers then receive external benefits from their training. In this paper, training firms increase profits by offering apprenticeships which commit firms to high wages for those trainees retained on completion. At these high wages, only good workers are retained. This signals their productivity and reduces the external benefits if they subsequently quit. Regulation of apprenticeship length (a historically important feature) enhances efficiency. Appropriate subsidies enhance it further.     

Optimal mixed taxation,credit constraints,and the timing of income tax reporting

We study optimal income and commodity tax policy with credit‐constrained low‐income households. Workers receive an even flow of income during the tax year, but report their incomes and make tax payments (receive transfers) at the end of the year. They spend their disposable income on multiple commodities over the year. We show that differentiated subsidies on commodities can be optimal even if the Atkinson–Stiglitz Theorem conditions apply. When the optimal policy leaves low‐income households with binding credit constraints, it may be optimal to subsidize differentially the good that they consume in higher proportion. Uniform subsidies would also relax the credit constraint, but would be more costly to the government since they would equally benefit unconstrained households. Numerical examples suggest that commodity tax differentiation increases with basic needs and with the interest rate at which government borrows.     

Worker displacement during the transition: Experience from Slovenia1

The Slovenian transition created labor displacements that were bigger than those experienced in North America in the 1980s. In Slovenia, probability of both layoffs and quits fell with worker tenure, firm profitability and expected severance costs. Individuals facing a higher probability of displacement accepted slower wage growth than otherwise comparable workers. The incentives to avoid displacement were strong – workers that actually were displaced faced a slow process of transiting out of unemployment with only one‐third finding re‐employment. Correcting for selection, real wage losses for displaced workers are comparable to those reported for displaced workers in North America.     

Employment Risk and Optimal Trade Policies

This paper considers trade policies and welfare in a Harris–Todaro model with risk-averse workers. Workers are assumed to have identical and homothetic preferences, but their incomes differ, depending on whether and where they are employed. When workers are equally valued, maximizing social utility is equivalent to maximizing the utility of a rural worker. An optimal policy consists of a production subsidy on the exportable and an import tariff. This model explains the widespread use of import tariffs on manufactured goods along with production subsidies on the export sectors in many LDCs.
JEL Classification Numbers: F13, D8.     

RESIDUAL WAGE DISPERSION WITH EFFICIENCY WAGES

This article extends a classic on‐the‐job search model of homogeneous workers and firms by introducing a shirking problem. Workers choose their effort levels and search on the job. Firms elicit effort through wages and monitoring; an inverse relationship between wages and monitoring rates is derived. Wages play a dual role by allocating labor supply and motivating employee effort. This gives rise to an equilibrium wage distribution that contrasts with existing literature. In particular, I show that a hump‐shaped and positively skewed wage distribution, as observed empirically, can be derived even when firms and workers are, respectively, identical.     

International Labor Union Policy and Growth with Creative Destruction*

A multi‐economy Schumpeterian growth model is constructed. Economies are interdependent through technology transfer. Households can stay as workers or become researchers at some cost. Workers are employed in production and researchers in R&D. Workers are unionized and union power depends on the government's protection. The main findings are as follows. If international technological dependence increases, then workers’ wages, the growth rate, and the level of welfare fall. The international coordination of labor union policy raises workers’ wages and promotes growth and welfare.     

Optimal Welfare-to-Work Programs

A Welfare-to-Work (WTW) program is a mix of government expenditures on various labour market policies targeted to the unemployed ( e.g. unemployment insurance (UI), job search monitoring (JM), social assistance (SA), wage subsidies). This paper provides a dynamic principal–agent framework suitable for analysing chief features of an optimal WTW program, such as the sequence and duration of the different policies, the dynamic pattern of payments along the unemployment spell, and the emergence of taxes/subsidies upon re-employment. The optimal program endogenously generates an absorbing policy of last resort ("social assistance") characterized by a constant lifetime payment and no active participation by the agent. Human capital depreciation is a necessary condition for policy transitions to be part of an optimal WTW program. The typical sequence of policies is quite simple: the program starts with standard UI, then switches into monitored search and, finally, into SA. The optimal benefits are decreasing during unemployment insurance and constant during both JM and SA. Whereas taxes (subsidies) can be either increasing or decreasing with duration during UI, they must decrease (increase) during a phase of JM. In a calibration exercise, we use our model to analyse quantitatively the features of the optimal program for the U.S. economy. With respect to the existing U.S. system, the optimal WTW scheme delivers sizeable welfare gains to unskilled workers because the incentives to search for a job can be retained even while delivering more insurance and using costly monitoring less intensively.     

RESIDUAL WAGE DISPARITY AND COORDINATION UNEMPLOYMENT*

How much of residual wage dispersion can be explained by an absence of coordination among firms? To answer, we construct a dynamic directed search model with identical workers where firms can create high‐ or low‐productivity jobs and are uncoordinated in their offers to workers, calibrated to the U.S. economy. Workers can exploit ex post opportunities once approached by firms, and can conduct on‐the‐job search. The stationary equilibrium wage distribution is hump‐shaped, skewed significantly to the right, and, with baseline parameters, generates residual dispersion statistics 75–90% of those found empirically. However, the model underestimates the average duration of unemployment.