European unemployment: how significant was a declining work ethic

Jean-Baptiste Michau argues that a declining work ethic helps to account for rising European unemployment from the 1970s.

Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective

While the participation decision is discrete in a static context, i.e. to work or not to work, such is not the case in a life-cycle context where workers choose the fraction of their lifetime that they spend working. In this paper, I therefore characterize the optimal redistribution policy in a life-cycle framework with both an intensive and an extensive margin of labor supply. The government should optimally design a history-dependent social security system which induces higher productivity individuals to retire later. Some redistribution therefore needs to be done through the pension system; a standard non-linear income tax is not enough.Extensive margin, Optimal redistribution, Retirement age, Social security

On the Provision of Insurance Against Search-Induced Wage Fluctuations

This paper investigates the provision of insurance to workers against search-induced wage fluctuations. I rely on numerical simulations of a model of on-the-job search and precautionary savings. The model is calibrated to low skilled workers in the U.S.. 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 is detrimental to the production efficiency of the economy. I show that progressivity raises the search intensity of unemployed worker, which reduces the equilibrium rate of unemployment, but lowers the search intensity of employed job seekers, which results in a lower output level. I also solve numerically for the optimal non-linear transfer schedule. The optimal policy is to provide almost no insurance up to a monthly income level of $1450, such as to preserve incentives to move up the wage ladder, and full insurance above$1650. This policy halves the standard deviation of labor incomes, increases output by 2.4% and generates a consumption-equivalent welfare gain of 1.3%. Forbidding 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 production efficiency

Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective

While the participation decision is discrete in a static context, i.e. to work or not to work, such is not the case in a life-cycle context where workers choose the fraction of their lifetime that they spend working. In this paper, I therefore characterize the optimal redistribution policy in a life-cycle framework with both an intensive and an extensive margin of labor supply. The government should optimally design a history-dependent social security system which induces higher productivity individuals to retire later. Some redistribution therefore needs to be done through the pension system; a standard non-linear income tax is not enough

Secular Stagnation: Theory and Remedies

This paper relies on a Ramsey model with money to o¤er a simple theory of secular stagnation. The permanent failure of the economy to produce at full capacity results from three features: (i) The combination of the zero lower bound on the nominal interest rate and of an in ‡ation ceiling imposes a lower bound on the real interest rate; (ii) Some dynastic households have a high propensity to save, due to a preference for wealth; (iii) A downward wage rigidity breaks the de ‡ationary spiral resulting from the lack of demand. In this framework, I derive the paradox of ‡exibility, of thrift, and of toil. If the in ‡ation ceiling cannot be raised, then the government needs to rely on …scal policy to escape secular stagnation. However, a conventional …scal stimulus is not an e¢ cient response to a permanent liquidity trap, and can even be welfare reducing. The solution is instead to tax household wealth and to subsidize income from physical capital, through an investment subsidy or a reduction in the taxation of corporate income. This optimal policy is revenue neutral and implements the …rst-best allocation of resources. However, to avoid a jump in the price level upon implementation of the optimal policy, the government needs to redeem the money that had previously been supplied to …nance public de…cits

Monetary and Fiscal Policy in a Liquidity Trap with Inflation Persistence

This paper relies on the new Keynesian model with inflation persistence to characterize the optimal monetary and fiscal policy in a liquidity trap. It shows that, with a Phillips curve that is both forward and backward looking, the monetary policy that is implemented during a liquidity trap episode can lift the economy out of depression. The central bank does not need to commit beyond the end of the crisis to get some traction on the level of economic activity. Regarding fiscal policy, inflation persistence justifies some front-loading of government expenditures to get ination started, which reduces the real interest rate. The magnitude of the optimal fiscal stimulus is decreasing in the degree of inflation persistence. Finally, if inflation persistence is due to adaptive expectations, rather than to price indexation, then monetary policy is ineffective while the optimal fiscal stimulus is large and heavily front-loaded

Essays on unemployment and labour market policies.

There is a considerable amount of heterogeneity in the individual success of workers on the labour market. This justifies the existence of social insurance and of redistribution programs. However, when investigating these policies, it is essential to take into account the search and informational frictions that characterize the labour market. The different chapters of this thesis all rely on dynamic macroeconomic representation of the economy in order to address labour market issues from either a positive or a normative perspective. The first chapter characterizes the optimal design of labour market institutions in a dynamic search model of the labour market. Particular attention is paid to the interaction between the different policy instruments due to the search-induced general equilibrium effects. The following chapter investigates, from a positive perspective, the impact of growth by creative destruction on the rate of unemployment when on-the-job search is allowed. Chapter 3 solves for the optimal provision of disability insurance in a dynamic context with imperfectly observable health. Chapter 4 characterizes the optimal redistributive policy with an endogenous decision to retire. Finally, the last chapter investigates, theoretically and empirically, the long-run interactions between the provision of unemployment insurance and the cultural transmission of work ethic

Optimal labor market policy with search frictions and risk-averse workers

This paper characterizes the optimal policy within a dynamic search model of the labor market with risk-averse workers. In a first-best allocation of resources, unemployment benefits should provide perfect insurance against the unemployment risk, layoff taxes are necessary to induce employers to internalize the cost of dismissing an employee but should not be too high in order to allow a desirable reallocation of workers from low to high productivity jobs, hiring subsidies are needed to partially offset the adverse impact of layoff taxes on job creation and payroll taxes should be approximately equal to zero. I obtain an optimal rate of unemployment which is, in general, different from the output maximizing rate of unemployment. When workers have some bargaining power, which prevents the provision of full insurance, it is optimal to reduce the rate of job creation below the output maximizing level in order to lower wages and increase the level of unemployment benefits. Thus, layoff taxes should typically exceed hiring subsidies which generates enough surplus to nance at least some of the unemployment benets. The inclusion of moral hazard does not change this conclusion, unless workers have low bargaining power

Optimal Time-Consistent Government Debt Maturity

Abstract: This paper develops a model of optimal debt maturity in which the government cannot issue statecontingent debt. As the literature has established, if the government can perfectly commit to fiscal policy, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust when lack of commitment is introduced. Under lack of commitment, large and tilted debt positions are very expensive to finance ex-ante since they ex-post exacerbate the government's problem stemming from a lack of commitment. In contrast, a flat maturity structure minimizes the cost entailed by a lack of commitment, though this structure also limits the ability to insure against shocks and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols