114 research outputs found
Markups and the Welfare Cost of Business Cycles : A Reappraisal
Gali et al. (2007) have recently shown in a quantitative way that inefficient fluctuations in the allocation of resources do not generate sizable welfare costs. In this note, we show that their evaluation underestimates the welfare costs of inefficient fluctuations and propose a biased estimate of the impact of structural distortions on business cycle costs. As monopolistic suppliers, both firms and households aim at preserving their expected markups ; the interaction between aggregate fluctuations in the efficiency gap and price-setting behaviors results in making average consumption and employment lower than their counterparts in the flexible price economy. This level increases the welfare cost of business cycles. It is all the more sizable in that the degree of inefficiency is structurally high at the steady state.Business cycle costs, inefficiency gap, new-Keynesian macroeconomics.
Inequality and Social Security Reforms
This paper develops a quantitative Markovian overlapping generations model with altruistic individuals and incomplete financial markets in order to analyze the long-run distributional implications of two hypothetical public social security policy changes, made in response to impending future demographic shifts. The two policy changes considered are first, raising the tax rate while keeping the replacement rate constant and second, keeping the tax rate constant while lowering the replacement rate. Whereas this latter policy is detrimental to the relative situation of the retirees, the huge financial heterogeneity in the first scenario explains why the increase in the proportional labor tax is relatively badly absorbed by low-productivity workers, leading to an increase in welfare inequality. We show that the very popular idea that a more funded system would ineluctably lead to more inequalities in well-being can be justified only by focusing on the inequality of positions in case of general equilibrium.Inequality, social security reform, idiosyncratic uncer-tainty, incomplete markets, altruism
Job Creation, Job Destruction and the Life Cycle
This paper originally incorporates life-cycle features into the job creation - job destruction framework. Once a finite horizon is introduced, this workhorse labor market model naturally delivers the empirically uncontroversial prediction that the employment rate of workers decreases with age due to lower hirings and higher firings of older workers. This age profile of hirings and firings is in addition found to be optimal in a competitive search
equilibrium context. If search externalities are not internalized and unemployment benefits distort equilibrium, there is a room for labor market policy differentiated by age. This lastly allows us to debate the incidence of labor demand policies which have been introduced in many countries to favor the older worker employment. We show that hiring subsidies and firing costs should be decreasing with age when unemployment benefits are sufficiently high, as in the Europe. On the contrary, if unemployment benefits are low, as in the US, optimal hiring subsidies and firing taxes should be increasing with age. In this latter case, the introduction of anti-discrimination laws is a good proxy of this first best policy.Job creations and destructions, Life cycle, Older workers
Distance to Retirement and The Job Search of Older Workers: The Case For Delaying Retirement Age
This paper presents a theoretical foundation and empirical evidence in favor of the view that the retirement age decision impacts on the employment of older workers before this age. Countries with a retirement age at 60 are indeed characterized by lower employment rates for workers aged 55-59. Based on the French Labor Force Survey, we show that the likelihood of employment is significantly affected by the distance from retirement, in addition to age and other relevant variables. We then extend McCall's (1970) job search model by explicitly integrating life-cycle features and the retirement decision. Using simulations, we show that the distance effect in conjunction with the generosity of unemployment benefits for older workers explains the low rate of employment just before the eligibility retirement age. Finally, we show that implementing actuarially-fair schemes, not only extends the retirement age, but also encourages a more intensive job-search by older unemployed workers.Job Search, Older Workers, Retirement
Quantifying the Laffer Curve on the Continued Activity Tax in a Dynastic Framework
It is argued that the tax on continued activity should be removed by implementing actuariallyfair schemes. However, these schemes cannot fund the expected Social Security deficit. This paper proposes to give individuals a fraction of the actuarially-fair incentives in the case of postponed retirement. Social Security faces a trade-off between giving enough incentives to make individualselay retirement and giving little increase in pensions in order to help finance its expected deficit. This trade-off is captured by a Laffer curve. Finally, when the Social Security system aims to maximize welfare, the optimal tax on postponed retirement is still strictly positive.retirement behavior and wealth, actuarially-fair benefits.
Matching frictions, unemployment dynamics and the cost of business cycles
We investigate the welfare cost of business cycles implied by matching frictions. First, using the reduced-form of the matching model, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry increases average unemployment, which leads to substantial business cycles costs. Moreover, the structural matching model embeds other non-linearities, which alter the average job finding rate and consequently the welfare cost of business cycles. Our theory suggests to subsidizing employment in order to dampen the impact of the job finding rate fluctuations on welfare.Business cycle costs; Unemployment dynamics; Matching
Life-Cycle Equilibrium Unemployment
This paper develops a life-cycle approach to equilibrium unemployment. Workers only differ respectively to their distance from deterministic retirement. A non age-directed search equilibrium is then typically featured by increasing (decreasing) firing (hiring) rates with age and a hump-shaped age profile for employment. Because of intergenerational inefficiencies, the Hosios condition no longer achieves efficiency. We then explore the optimal age-pattern of some policy tools to restore this efficiency. The optimal profile for employment subsidies should increase with age, whereas firing taxes and hirings subsidies would have to be hump-shaped. Lastly, we examine the robustness of our results. We show that age-directed recruitment policies cannot exist in equilibrium even if it would have been ex-ante possible, and that introducing endogenous search effort of unemployed workers reinforces our main results.job search, matching, life cycle
Age-Dependent Employment Protection
This paper examines the age-related design of firing taxes by extending the theory of job creation and job destruction to account for a finite working life-time. We first argue that the potential employment gains related to employment protection are high for older workers, but higher firing taxes for these workers increase job destruction rates for the younger generations. On the other hand, age-decreasing firing taxes can lead to lower job destruction rates at all ages. Furthermore, from a normative standpoint, because firings of older (younger) workers exert a negative (positive) externality on the matching process, we find that the first best age-dynamic of firing taxes and hiring subsidies is typically hump-shaped. Taking into account distortions related to unemployment benefits and bargaining power shows the robustness of this result, in contradiction with the existing policies in most OECD countries.foo
Unemployment Dynamics and the Cost of Business Cycles
In this paper, we investigate whether business cycles can imply sizable effects on average unemployment. First, using a reduced-form model of the labor market, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry is enough to generate substantial welfare implications. This result also holds when we allow the job finding rate to be endogenous, provided the structural model is able to reproduce the volatility of the job finding rate. Moreover, the matching model embeds other non-linearities which alter the average job finding rate and so the business cycle cost.business cycle costs, unemployment dynamics
Inequality and Social Security Reforms
This paper develops a quantitative Markovian overlapping generations model with altruistic individuals and incomplete financial markets in order to analyze the long-run distributional implications of two hypothetical public social security policy changes, made in response to impending future demographic shifts. The two policy changes considered are first, raising the tax rate while keeping the replacement rate constant and second, keeping the tax rate constant while lowering the replacement rate. Whereas this latter policy is detrimental to the relative situation of the retirees, the huge financial heterogeneity in the first scenario explains why the increase in the proportional labor tax is relatively badly absorbed by low-productivity workers, leading to an increase in welfare inequality. We show that the very popular idea that a more funded system would ineluctably lead to more inequalities in well-being can be justified only by focusing on the inequality of positions in case of general equilibrium
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