Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits

Abstract

We develop an equilibrium search-matching model with risk-neutral agents and two-sided ex-ante heterogeneity. Unemployment insurance has the standard e ect of reducing employment, but also helps workers to get a suitable job. The predictions of our simple model are consistent with the contrasting performance of the labor market in Europe and US in terms of unemployment, productivity g r o wth and wage inequality. T o s h o w this, we construct two ctitious economies with calibrated parameters which only di er by the degree of unemployment insurance and assume that they are hit by a common technological shock which enhances the importance of mismatch. This shock reduces the proportion of jobs which w orkers regards as acceptable in the economy with unemployment insurance (Europe). As a result, unemployment doubles in this economy. In the laissez-faire economy ( US), unemployment r emains constant, but wage inequality increases more and productivity grows less due to larger mismatch. The model can be used to address a number of normative issues.

Optimal unemployment benefit policy and the firm productivity distribution

“…Marimon and Zilibotti (1999) show that unemployment compensation improves matching between ex-ante heterogenous workers and ex-ante heterogenous firms under random matching. Unemployment compensation serves to reduce worker-job mismatch, as without unemployment compensation, workers would tend to accept unsuitable jobs.…”

“…The current paper is thus able to revisit the case for a declining time profile of unemployment benefits and to provide a novel justification. To summarize our approach: We follow Mortensen (1977), Diamond (1981), Albrecht and Axell (1984) and Marimon and Zilibotti (1999) in viewing unemployment benefits as a search subsidy, and we study the role policy may play in attaining a better match 7 between jobs and workers. The crucial insight is that in a search environment where the assignment of unemployed workers to heterogenous firms is uncoordinated, there is a tradeoff between employment and average worker productivity.…”

Collective versus decentralized wage bargaining and the efficient allocation of resources

“…Marimon and Zilibotti (1999) consider the case, ψ = 0 which is related to the stochastic matching model of Pissarides (2000). If off-and on-the-job search are equally efficient, ψ = 1 the model is relatively simple and analytical results can be obtained.…”

“…Point of departure is Marimon and Zilibotti (1999) and Gautier, Teulings and van Vuuren (2010). Worker (s) and job types (c) are locations on a circle with circumference 1.…”

“…Search frictions are important because it takes time for workers to find the production units where they are needed most and we will see that wages play a potentially important signalling role. This paper uses a circular model similar to Marimon and Zilibotti (1999) and Gautier, Teulings and van Vuuren (2010). The idea is that worker (s) and job types (c) are located on a circle and productivity is decreasing in the distance, x, between s and c. 1 In the centralized-wage setting case, all firm types, c, must offer the same wage while in the decentralized case, firm types c are allowed to post different wages to different worker types, s. We distinguish between contracts where firms can and where they cannot ex ante commit to a wage schedule.…”