On-the-job search equilibrium with endogenous unemployment benefits

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

“…To reach optimality, the distribution of unemployment benefits should therefore collapse to a mass point. Following this result, Chéron and Langot (2010) highlight in a job search model with endogenous WIUB, the trade-off between inefficient unemployment on the one hand, and insurance and subsidy motives on the other. In spite of the subsidy motives that favor the Bismarckian system, they show that the Beveridgian system should be preferred.…”

“…In literature, the Bismarckian system of unemployment benefits is blamed for creating unemployment (Ljungqvist and Sargent (1998), Ljungqvist and Sargent (2008), Chéron and Langot (2010)). Burdett and Mortensen (1998) show that, when there is pure wage dispersion, the wage-indexed unemployment benefits (WIUB) generate heterogenous unemployment benefits that do not reflect the heterogeneity of workers' abilities.…”

“…In reality, workers, even if they are homogenous in terms of skills, are heterogenous in terms of past working experience and wage opportunities through their age heterogeneity. Besides, Chéron and Langot (2010) omit to account for the capacity of UB to reduce inefficient turnover (Stigler (1946), Mortensen (1998), Manning (2003)). In this paper, we fill these two gaps and show that the results shown in literature can be questioned.…”

“…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 Chéron 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%.…”

Thumbscrews for Agencies or for Individuals? How to Reduce Unemployment

“…The model allows for time-dependent unemployment bene…ts, as in Albrecht and Vroman (2005) and Coles and Masters (2006), to capture the di¤erences between unemployment insurance (UI) and unemployment assistance (UA) payments. Bene…ts are proportional to past wages, as in Chéron and Langot (2010), and there is a …xed time limit on UI. Workers optimally choose search e¤ort, as in Cahuc and Lehmann (2000) and Lehmann and van der Linden (2007), and experience negative duration dependence of their exit rates out of unemployment due to Bayesian learning.…”