Taxation, Public Policy, and Dynamics of Unemployment

This paper provides an overview of the key issues relating to taxation, public policy and the dynamics of unemployment.It takes issue with the widely held view that generous social insurance schemes and the associated highpayroll taxes have been the major cause of the high unemployment rates which have persisted in Europe over thepast 15 years. It puts forward a framework for a theory of adjustment, based on the portfolio theory of the riskaverse firm and the efficiency wage theory of labor markets. This is used to explain why in the onset of a downturn,the hiring rate may lag the layoff rate, thus giving rise to rising unemployment rates. It is also shown to provideguidance as to policies which enhance the ability of firms to bear risks and which reduce costs of hiring and firing.The paper argues that while policies which increase severance or layoff costs may be well intended they mayactually serve to exacerbate the magnitude of employment fluctuations. Similarly, unemployment compensation,which is designed to ease the burden on those who are unemployed, may lead to higher levels of equilibriumunemployment. These programs can be restructured in ways which simultaneously ease the short-run burden ofthose thrown into unemployment, while reducing the adverse impact of these programs on the unemployment rate.     

New Keynesian perspectives on labor market dynamics

We find that demand shocks play an important role for business-cycle fluctuations in unemployment and job vacancies. The reason is that those shocks give a strong incentive to demand-constrained firms to adjust production and thereby labor input. Furthermore we argue that whether real wage rigidity à la Hall [2005. Employment fluctuations with equilibrium wage stickiness. American Economic Review 95, 50–65] helps explain the remaining part of the unemployment volatility puzzle depends critically on assumptions regarding the form of the wage bargain between firms and workers. Real wage rigidity tends to generate volatility in employment only in the case in which hours are chosen efficiently. If, on the other hand, the real wage is allowed to affect firms's choices of hours directly, the feature of real wage rigidity loses its ability to increase employment volatility.     

Equilibrium Unemployment, Job Flows, and Inflation Dynamics

In order to explain the joint fluctuations of output, inflation and the labor market, this paper develops and estimates a general equilibrium model that integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The estimated model accounts for the responses of employment, hours per worker, job creation, and job destruction to a monetary policy shock. Moreover, search frictions in the labor market generate a lower elasticity of marginal costs with respect to output. This helps to explain the sluggishness of inflation and the persistence of output that are observed in the data.     

Understanding European unemployment with matching and search-island models

To understand European and American unemployment during the last 60 years, we use a search-island model and four matching models with workers who have heterogeneous skills and entitlements to government benefits. When there is higher turbulence, in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs, high government mandated unemployment insurance (UI) and employment protection (EP) in Europe increase unemployment rates and durations. But when there is lower turbulence, high European EP suppresses unemployment rates despite high European UI. Four matching models differ in how they assign unemployed workers to matching functions. That affects how strongly unemployment responds to increases in turbulence. Heterogeneity among unemployed workers highlights the central role of adverse labor market externalities in matching models and reveals that the cost of posting vacancies is the lynchpin of a matching model.     

Screening and Labor Market Flows in a Model with Heterogeneous Workers

We construct a model in which screening of heterogeneous workers by employers plays a central role in determining both the flows into and out of unemployment. Following a negative productivity shock, the share of low‐efficiency workers in the pool of unemployed rises, and this composition effect reduces the incentive of firms to post vacancies, lowering job opportunities for all workers. Heterogeneity in workers’ efficiency amplifies unemployment fluctuations in economies with small gross labor flows and leads to persistent buildups of unemployment and slow recoveries. The composition effect worsens the unemployment–inflation trade‐off faced by the monetary authority, leading to very large sacrifice ratios when a fall in productivity primarily affects low‐efficiency workers.     

Equilibrium matching and termination

In an equilibrium model of the labor market with moral hazard, jobs are dynamic contracts, job separations are terminations of optimal dynamic contracts. Transitions from unemployment to new jobs are modeled as a process of random matching and Nash bargaining. Non-employed workers make consumption and saving decisions as in a standard growth model, as well as whether or not to participate in the labor market. The stationary equilibrium is characterized. The model is then calibrated to the U.S. labor market to study quantitatively the worker flows and distributions, the compensation dynamics, and the effects of UI system.     

Household Level Economic Incentives, Unemployment Trap and Job Finding Probability

This paper considers the sensitivity of the household's disposable income with respect to the labour market states and the labour market transitions of unemployed workers. The paper analyses the following questions: (i) which are the determinants of starting wages? (ii) how many unemployed are in the unemployment trap? (iii) how do household level economic incentives affect the conditional probability of finding a job? The empirical analysis is based on individual panel data covering the years 1987–1993 in Finland, when the unemployment rate rose from about 4% to 18%. We have estimated the starting wage equation to calculate the effects of hypothetical re-employment on the household's disposable income and to evaluate the frequency of the unemployment trap. To analyse factors affecting the transition out of unemployment to employment in open labour market, we estimate unemployment duration using a semi-parametric proportional risk model. The paper shows that the impact of the economic incentives, measured by the hypothetical change in household disposable income, on employment is more important in the recession than in the boom.     

Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France

We evaluate the effect of downside insurance on self-employment. We exploit a large-scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one-for-one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.     

Unemployment insurance: Risk sharing versus efficiency

Two models of spot labor markets are presented in which labor suppliers have heterogeneous attitudes towards effort and in which uncertainty prevails on labor productivity and growth. The problem of selecting efficient rules to manage unemployment insurance (UI) systems is considered. We show that there does not exist any system which combines an efficient allocation of labor with an efficient allocation of risks among employees, unemployed workers and capital-owners. Pareto-efficient policy rules are a best compromise between these two conflicting objectives. It implies that productive efficiency could be improved in periods of mass unemployment by reducing UI benefits. That would be at the expense of more inefficiencies in the sharing of macroeconomic risks. At the optimum, the UI benefit is positively correlated to growth and it is negatively correlated to labor productivity.     

On the importance of the participation margin for labor market fluctuations

Conventional analyses of labor market fluctuations ascribe a minor role to labor force participation. We show, by contrast, that flows-based analyses imply that the participation margin accounts for around one-third of unemployment fluctuations. A novel stock-flow apparatus establishes these facts, delivering three further contributions. First, the role of the participation margin appears robust to adjustments for spurious transitions induced by reporting error. Second, conventional stocks-based analyses are subject to a stock-flow fallacy, neglecting offsetting forces of worker flows on the participation rate. Third, increases in labor force attachment among the unemployed during recessions are a leading explanation for the role of the participation margin.     

Employer Health Insurance Mandates and the Risk of Unemployment

Employer health insurance mandates form the basis of many health care reform proposals. Proponents make the case that they will increase insurance, while opponents raise the concern that low-wage workers will see offsetting reductions in their wages and that in the presence of minimum wage laws some of the lowest wage workers will become unemployed. We construct an estimate of the number of workers whose wages are so close to the minimum wage that they cannot be lowered to absorb the cost of health insurance, using detailed data on wages, health insurance, and demographics from the Current Population Survey (CPS). We find that 33 percent of uninsured workers earn within $3 of the minimum wage, putting them at risk of unemployment if their employers were required to offer insurance. Assuming an elasticity of employment with respect to minimum wage increase of -0.10, we estimate that 0.2 percent of all full-time workers and 1.4 percent of uninsured full-time workers would lose their jobs because of a health insurance mandate. Workers who would lose their jobs are disproportionately likely to be high school dropouts, minority, and female. This risk of unemployment should be a crucial component in the evaluation of both the effectiveness and distributional implications of these policies relative to alternatives such as tax credits, Medicaid expansions, and individual mandates, and their broader effects on the well-being of low-wage workers.     

On the cyclical behavior of employment, unemployment and labor force participation

In this paper I evaluate to what extent a real business cycle (RBC) model that incorporates search and home production decisions can simultaneously account for the observed behavior of employment, unemployment and out-of-the-labor-force. This contrasts with the previous RBC literature, which analyzed employment or hours fluctuations either by lumping together unemployment and out-of-the-labor-force into a single non-employment state or by assuming a fixed labor force. Once the three employment states are explicitly introduced I find that the RBC model generates highly counterfactual labor market dynamics.     

Labor‐Market Institutions and Long‐Term Effects of Youth Unemployment

Graduating from a school during a time of adverse economic conditions has a persistent, harmful effect on workers’ subsequent employment opportunities. An analysis of panel data from OECD countries during the 1960–2010 periods reveals that a worker who experiences a 1 percentage point higher unemployment rate while the worker is 16–24 years old has a 0.14 percentage point higher unemployment rate at ages 25–29 years and 0.03 percentage points higher at ages 30–34 years. The persistence of this negative effect is stronger in countries with stricter employment protection legislation. A composite index for labor‐market rigidity is constructed and the index is shown to have positive correlation with the persistence. Moderating macroeconomic fluctuations is more important in countries that have more persistent labor‐market entry effects on subsequent outcomes.     

Job search,unemployment and savings

This paper examines optimal search policies on the basis of two alternative assumptions, first that individuals consume income as it is received, and second, that individuals can save and subsequently draw from their savings. In this model workers search for heterogeneousjobs, which are characterized by fixed wages and random duration of employment spells. Workers choose jobs which will maximize the total expected lifetime utility of consumption. The optimal steady-state job acceptance policy in both cases takes the form of a fixed partition of the set of all job offers into acceptable and unacceptable ones. In the absence of a capital market, employment duration appears to be irrelevant for the marginal job offer and all jobs offering wages which exceed the marginal one are also acceptable independent of the distribution functions of employment duration. Nevertheless, the dispersion of employment duration at inframarginal acceptable jobs affects job choice. It is shown that when individuals can save, and if current utility and probability density functions are exponential, then steady-state rates of saving during periods of employment, and of dissaving during periods of unemployment, are independent of wealth and constant. The model developed is then used to examine the determinants of unemployment and the properties of optimal savings rates, and to obtain a number of testable hypotheses about savings behavior and job security.     

失业保险与公司财务杠杆

我国劳动力市场化程度日益加深导致劳动者职业转换愈加频繁,失业保险的作用日益突出。本文探究了失业保险金水平对企业财务杠杆的影响。运用2009—2019年上市公司数据进行实证分析,结果发现失业保险金上升会导致公司财务杠杆下降。渠道检验显示,提高失业保险金可以降低员工失业风险溢酬,公司劳动力成本下降,公司有更多自由现金流和盈利进行内源融资和偿还债务,公司财务杠杆下降。进一步分析发现,失业保险金的作用在失业率高的地区更加显著。主要结果在分别运用《社会保险法》和《关于调整失业保险金标准的指导意见》构造双重差分模型和工具变量解决内生性问题、更改模型设置、排除投资水平影响、删除特殊省份、更换样本期间后,依然成立。本文结果说明加大失业保险保障力度有助于降低企业财务风险。     

How important is intra-household risk sharing for savings and labor supply?

While it is recognized that the family is a risk-sharing institution, little is known about the quantitative effects of this source of insurance on savings and labor supply. In this paper, we present a model where workers (females and males) are subject to idiosyncratic employment risk and where capital markets are incomplete. A household is formed by a female and a male, who decide on consumption, savings and labor supplies. In a calibrated version of our model we find that intra-household risk sharing has its largest impact among wealth-poor households. While the wealth-rich use mainly savings to smooth consumption across unemployment spells, wealth-poor households rely on spousal labor supply. For instance, for low-wealth households, average hours worked by wives of unemployed husbands are 8% higher than those worked by wives of employed husbands. This response in wives’ hours makes up 9% of lost family income. We also study consumption losses upon an unemployment spell, precautionary savings and the crowding out effects of the public unemployment insurance program on the extent of risk sharing within the household.     

In search of the natural rate of unemployment

The natural rate of unemployment can be measured as the time-varying steady state of a structural vector autoregression. For post-War US data, the natural rate implied by this approach is more volatile than most previous estimates, with its movements accounting for the bulk of the variation in the unemployment rate, as well as substantial portions of the variation in aggregate output and inflation. These movements, in turn, can be related to variables associated with labor-market search theory, including unemployment benefits, labor productivity, real wages, and sectoral shifts in the labor market. There is also a strong negative relationship between inflation and the corresponding measure of cyclical unemployment, supporting the existence of a short-run Phillips curve.     

Big locational unemployment differences despite high labor mobility

Considerable labor mobility exists across US states, enough that, if migration arbitrages local unemployment, one might expect very low unemployment differences across states. However, cross-state data reveal large unemployment differences. An equilibrium multi-location model with stochastic worker-location match productivity and within-location trading frictions can account for these facts. In the model, some workers move to, or stay in, a location with high unemployment because they are more productive there than elsewhere. According to the model, labor mobility and aggregate unemployment are negatively related. This prediction is in stark contrast to standard sectoral reallocation theory, but consistent with the US data.     

东北老工业基地经济转型中的失业特征分析

在经济转型过程中东北老工业基地出现了严重的失业问题,目前下岗职工再就业问题仍未从根本上解决,失业人数仍然在不断增加,新失业群体也不断出现,甚至在某些地区或行业还出现了群集现象,重点发展第三产业、民营企业、中小企业是破解就业问题的根本出路。     

Understanding European unemployment with a representative family model

A representative family model with indivisible labor and employment lotteries has no labor market frictions and complete markets. Nevertheless, its aggregate responses to an increase in government supplied unemployment insurance (UI) and to an increase in microeconomic turbulence are qualitatively similar to those in two macromodels with labor market frictions and incomplete markets, namely, the matching and search-island models in Ljungqvist and Sargent [2007a. Understanding European unemployment with matching and search-island models. Journal of Monetary Economics, this issue]. Because there is no frictional unemployment in the representative family model, an increase in employment protection (EP) decreases aggregate work because the representative family substitutes leisure for work, an effect opposite to what occurs in matching and search-island models. Heterogeneity among workers highlights the economy-wide coordination in labor supply and consumption sharing that employment lotteries and complete markets achieve in the representative family model. A high disutility of labor makes generous UI cause very low employment levels.