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.     

Understanding the welfare effects of unemployment insurance policy in general equilibrium

This paper analyzes the welfare effects of unemployment insurance reforms in a general equilibrium incomplete market model. In particular, it decomposes the total welfare effect for each individual into different factors. I consider a model where the consumers face an uninsurable unemployment risk, can save in an interest-bearing asset, and are subject to a borrowing constraint. The labor market is modeled using a Diamond–Mortensen–Pissarides style search and matching model. The decomposition exercises reveal how each factor contributes to the heterogeneity of welfare effects among different consumers.     

BUSINESS CYCLES IN THE EQUILIBRIUM MODEL OF LABOR MARKET SEARCH AND SELF‐INSURANCE*

I introduce risk‐aversion, labor‐leisure choice, capital, individual productivity shocks, and market incompleteness to the standard model of labor search and matching and investigate the model’s cyclical properties. I find that the model can generate the observed large volatility of unemployment and vacancies with a reasonable replacement rate of unemployment insurance benefits of 64%. Labor‐leisure choice plays a crucial role through additional utility from leisure when unemployed and further amplification from adjustments of hours worked. On the other hand, the borrowing constraint or individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies.     

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.     

Integration of unemployment insurance with retirement insurance

This paper analyzes a social insurance system that integrates unemployment insurance with a pension program, allowing workers to borrow against their future wage income to finance consumption during an unemployment episode and thus improving search incentives while reducing the risks arising from unemployment. This paper identifies the conditions under which integration improves welfare and the factors which determine the optimal degree of integration. We show that when the duration of unemployment is very short compared to the period of employment or retirement, the optimal system involves exclusive reliance on pension-funded self-insurance. This system imposes a negligible risk burden for workers while avoiding attenuating search incentives. We also argue that joint integration of several social insurance programs with a pension program through an individual account is desirable unless the risks are perfectly correlated with each other.     

ASSET‐BASED UNEMPLOYMENT INSURANCE*

This article studies a model of consumption, savings, and job search in which a borrowing constraint limits self‐insurance. The government administers the unemployment insurance program that may condition on an individual’s asset position, but not on her efforts of finding a job. To compensate for the impediments to self‐insurance, benefit payments should optimally be set higher at lower wealth levels and peak for borrowing‐constrained individuals with zero liquid funds. A quantitative exercise reveals that the U.S. unemployment insurance program is surprisingly close to optimal for the asset poor, but far too generous for wealthier individuals.     

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.     

A general formula for the optimal level of social insurance

In an influential paper, Baily (1978) showed that the optimal level of unemployment insurance (UI) in a stylized static model depends on only three parameters: risk aversion, the consumption-smoothing benefit of UI, and the elasticity of unemployment durations with respect to the benefit rate. This paper examines the key economic assumptions under which these parameters determine the optimal level of social insurance. I show that a Baily-type expression, with an adjustment for precautionary saving motives, holds in a general class of dynamic models subject to weak regularity conditions. For example, the simple reduced-form formula derived here applies with arbitrary borrowing constraints, durable consumption goods, private insurance arrangements, and search and leisure benefits of unemployment.     

On the Provision of Insurance against Search‐Induced Wage Fluctuations*

Should workers be provided with insurance against search‐induced wage fluctuations? To answer this question, I rely on the numerical simulations of a model of on‐the‐job search and precautionary savings. The model is calibrated to low‐skilled workers in the United States. The extent of insurance is determined by the degree of progressivity of a non‐linear transfer schedule. The fundamental trade‐off is that a more generous provision of insurance reduces incentives to search for better‐paying jobs, which increases the cost of providing insurance. I show that progressivity raises the search intensity of unemployed workers, which reduces the equilibrium rate of unemployment, but it lowers the search intensity of employed job seekers, which reduces the output level. I also solve numerically for the optimal non‐linear transfer schedule. The optimal policy is to provide little insurance up to a monthly income level of $1350, so as to preserve incentives to move up the wage ladder, and nearly full insurance above $1450. This policy reduces the standard deviation of labor income net of transfers by 34 per cent and generates a consumption‐equivalent welfare gain of 0.7 per cent. The absence of private savings does not fundamentally change the shape of the optimal transfer function, but tilts the optimal policy towards more insurance, at the expense of a less efficient allocation of workers across jobs.     

The optimal taxation of unskilled labor with job search and social assistance

In order to explore the optimal taxation of low-skilled labor, we extend the standard model of optimal nonlinear income taxation in the presence of quasi-linear preferences in leisure by allowing for involuntary unemployment, job search and an exogenous welfare benefit. In trading off low-skilled employment against work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Higher welfare benefits typically reduce taxes paid by low-skilled workers and raise marginal tax rates throughout the skill distribution.     

Does the public employment service affect search effort and outcomes?

In this paper, we examine the disincentive effects of the public employment service on the search effort of unemployed workers and on their exit rate from unemployment. For that purpose, we specify a structural search model with fixed and variable costs of search in which unemployed workers select their optimal search intensity given the exogenous arrival rate of job contacts coming from the public employment agency. Because the theoretical effect of an increase in this exogenous job contact arrival rate on the structural exit rate from unemployment is ambiguous, we estimate this model using individual unemployment duration data. Our results show that the exit rate from unemployment increases with the arrival rate of job contacts obtained by the public employment service, especially for low-educated and low-skilled workers. They also show that the search effort is more costly for low-educated women and low-skilled adult unemployed workers. This last result suggests that a public employment agency that matches searchers and employers is beneficial, in the sense that it saves searchers in terms of search costs they would otherwise bear.     

Unemployment insurance design: Inducing moving and retraining

Evidence suggests that unemployed individuals can affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. Absent wealth effects on behavior, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment benefits should increase over the unemployment spell, with an initial period with low benefits and an increase after this period has expired.     

The long-term effects of job search requirements: Evidence from the UK JSA reform

This paper investigates long-term returns from unemployment compensation, exploiting variation from the UK JSA reform of 1996, which implied a major increase in job search requirements for eligibility and in the related administrative hurdle. Search theory predicts that such changes should raise the proportion of nonclaimant nonemployed, with consequences on search effort and labor market attachment, and lower the reservation wage of the unemployed, with negative effects on post-unemployment wages. I test these ideas on longitudinal data from social security records (LLMDB). Using a difference in differences approach, I find that individuals who start an unemployment spell soon after JSA introduction, as opposed to 6 months earlier, are 2.5–3% more likely to move from unemployment into Incapacity Benefits spells, and 4–5% less likely to have positive earnings in the following year. This latter employment effect only vanishes 4 years after the initial unemployment shock. Also, annual earnings for the treated individuals are lower than for the non-treated. These results suggest that while tighter search requirements were successful in moving individuals off unemployment benefits, they were not successful in moving them onto stable or better jobs, with fairly long-lasting unintended consequences on a number of labor market outcomes.     

Optimal welfare and in-work benefits with search unemployment and observable abilities

This paper explores the optimal interaction between the tax system and social assistance in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. The relationship between welfare benefits and the optimal level of in-work benefits is U-shaped. This explains why in-work benefits are called for both in countries that grant low welfare benefits and countries that provide high welfare benefits. An earned-income tax credit optimally induces all agents to look for work if job search is cheap and effective, agents are not very risk averse, and the least-skilled agents are relatively productive.     

Optimal Workfare with Voluntary and Involuntary Unemployment*

This paper addresses the welfare implications of introducing workfare into unemployment benefit policy. We consider a population composed of employed and unemployed workers and of individuals who do not seek employment. Job search behavior is unobservable, which means that voluntarily unemployed individuals can claim unemployment insurance (UI) benefits intended for unemployed workers. As a consequence, pecuniary benefit schemes underinsure workers against unemployment. We show that requiring unproductive activities (workfare) in exchange for UI benefits may generate a Pareto improvement by facilitating better unemployment insurance for workers, and we characterize the situations where this is the case.     

Unemployment insurance with hidden savings

This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal contract, the agent is neither saving nor borrowing constrained. Counter-intuitively, his consumption declines faster than implied by Hopenhayn and Nicolini (1997) [1]. The efficient allocation can be implemented by an increasing benefit during unemployment and a constant tax during employment.     

Unemployment insurance,recalls, and experience rating

In the United States, almost half of the workers who separated from their jobs ended their unemployment spell by returning to work for their last employer. In this study, we explore the impact of the experience rating (ER) system on recalls. In states using reserve ratio ER, and for a firm that is not at the minimum or the maximum tax rate, each layoff of a worker receiving unemployment benefits increases the future tax rate while each recall reduces it. This provides a natural incentive for firms to recall former workers receiving unemployment benefits. We use the Quarterly Workforce Indicators dataset, which provides information on recalls at the county level, and exploit the differences in tax schedule across states to estimate the impact of ER on recalls. We show that the recall share from hires increases with the degree of ER. We then develop a search and matching model with different unemployment insurance (UI) status, endogenous UI take-up, endogenous separations, recalls, and new hires. We illustrate that this model reproduces the effects of ER on recalls admirably. We show that an increase in the intensity of ER translates into a higher recall share at the steady state, especially for unemployed workers collecting unemployment benefits. We then use this model to analyze the labor market dynamics under alternative financing schemes. We show that ER has stabilization virtues—the higher the degree of ER, the less volatile the unemployment rate.     

Search costs and efficiency: Do unemployed workers search enough?

Many labor market policies affect the marginal benefits and costs of job search. The impact and desirability of such policies depend on the distribution of search costs. In this paper, we provide an equilibrium framework for identifying the distribution of search costs and we apply it to the Dutch labor market. In our model, the wage distribution, job search intensities, and firm entry are simultaneously determined in market equilibrium. Given the distribution of search intensities (which we directly observe), we calibrate the search cost distribution and the flow value of non-market time; these values are then used to derive the socially optimal firm entry rates and distribution of job search intensities. From a social point of view, some unemployed workers search too little due to a hold-up problem, while other unemployed workers search too much due to coordination frictions and rent-seeking behavior. Our results indicate that jointly increasing unemployment benefits and the sanctions for unemployed workers who do not search at all can be welfare-improving.     

Measuring Search Frictions Using Japanese Microdata

This paper estimates individual‐level matching functions to measure search frictions in the Japanese labour market and presents the determinants of search duration. We employ administrative microdata that track the job search process of job seekers who left or lost their job in August 2005 and subsequently registered at their local public employment service. Our finding is that the matching function exhibits decreasing rather than constant returns‐to‐scale for job seekers and vacancies. We also find that after controlling for the benefits period, job seekers who lost their job involuntarily were more likely than those quitting voluntarily to exit from unemployment.     

总体努力水平约束下的Tullock竞赛与最优约束机制设计:总体约束,个体约束还是无努力水平约束?

竞赛中参赛者往往面临各种参与约束,本文研究总体努力水平约束下的Tullock竞赛以及竞赛组织者如何最大化总努力水平。我们刻画了总体约束下的Tullock竞赛均衡,并将均衡努力水平与无约束及对称个体约束下的结果相比较。为了诱致出最高的总努力水平,最优总体约束水平和对称个体约束水平都应设定在比对奖品估值较高参与者的估值稍微低一点的水平,而最优非对称个体约束则要把估值较高参与者面临的约束设在比其估值稍微低一点的水平。