Unemployment insurance and training in an equilibrium matching model with heterogeneous agents

This paper develops a joint evaluation of vocational training and unemployment insurance. This allows to analyze how these schemes complment each other from the viewpoints of labor market indicators and of welfare. For this purpose, a general equilibrium matching model is built where workers are heterogeneous and risk averse. Heterogeneity allows to look at the distribution of the effects. Job search effort and wages are endogenous in order to deal with the induced effects of these schemes. The net effect of these training programs appears to be gloomy. However, their impact on employment can be deeply affected by the design of passive policies. A declining time profile of benefit payments dominates a scheme with a constant replacement ratio. However, the optimal expected length of payment of ‘high’ benefits can vary a lot in the population. A reform that would relate this expected duration to search effort does not appear to produce substantial effects on any of the evaluation crieria. Performance indicators of the labor market and welfare criteria often vary in opposite directions after a reform. This questions the widespread focus on labor market indicators to guide the design of institutional reforms.training; unemployment insurance; sanctions; policy complementaries; wage bargaining; equilibrium unemployment; equilibrium search

Fighting unemployment without worsening povety: Basic income versus reductions of social security contributions

Reductions of social security contributions (RSSC) and a basic income (BI) (or the related Negative Income Tax) are considered in a dynamic general equilibrium framework with imperfect competition on the labour market (the ‘wage-setting/price-setting’ model). The cases with homogeneous and heterogeneous workers are considered. It turns out that both policies have a long-run effect on the unemployment rate if they are appropriately designed. With two types of skills, this proposition holds if relative wages are rigid and if the supply of skills is not perfectly elastic. A welfare analysis shows that introducing appropriately framed RSSC or BI can be a Pareto improvement.basic income; taxation; payroll taxes; social insurance; wage bargaining; equilibrium unemployment

Active Citizen's Income, Unconditional Income and Participation under Imperfect Competition: A Normative Analysis.

Various types of basic income schemes are considered to compensate the allocative inefficiencies induced by unemployment insurance systems. This paper develops a dynamic general equilibrium model of a unionized economy where participation to the labor market is endogenous and the budget of the State has to balance. It is shown that basic income schemes reduce the equilibrium unemployment rate. The normative analysis suggest that only the active population should be eligible to the basic income. Introducing an `active citizen's income' can be a Pareto-improving reform.Basic income; wage bargaining; unemployment; participation; optimal taxation; ‘`WS-PS' model

Equilibrium Evaluation of Active Labor Market Programmes Enhancing Matching Effectiveness

This paper evaluates counselling programmes in an equilibrium matching model where workers are heterogeneous in skill levels. Job search effort, labour demand and wages are endogenous. When wages are bargained over, raising the effectiveness of or the access to counselling programmes pushes wages upwards and leads to lower search effort among nonparticipants. The effects of increasing the access of the low-skilled are evaluated numerically by enlarging sucessively the set of endogenous behaviours. Induced effects outweigh substantial positive micro effects on low-skilled employment when all ‘margins’ are taken into account. The inter-temporal utility of the low-skilled nevertheless increases because search effort declines. On the contrary, when the net wage of the low-skilled is a fixed proportion of the one bargained by the high-skilled, raising the access to counselling programmes has small positive effects on all criteria.Active programmes; labour market policies; evaluation; policy complementarities; wage bargaining; equilibrum unemployment; equilibrium search

Embeddedness, cooperation and popular-economy firms in the informal sector

This paper is motivated by empirical observations on popular-economy firms (PEFs) in the informal sector of Santiago de Chile. These are labor-managed firms embedded in popular milieu where cooperation between their members plays a central role. This paper develops a (partial equilibrium) microeconomic theory of PEFs. First, it endogeneizes the level of cooperation between the workers. Second, it develops a static and a dynamic model to analyze whether embeddedness influences the behavior of the PEF. Embeddedness is assumed to be captured by three different characteristics suggested by the empirical observations. Most of them influence the employment and income levels in the PEF.embeddedness; cooperation; labor-managed firms; Popular-economy firm

Labor Market Policies and Equilibrium Employment : Theory and Application for Belgium

This paper is concerned with the general equilibrium effects of active labor market programs and the unemployment insurance system (the replacement ratio and the level of sanctions). It develops an equilibrium job matching model where active programs and the rate of sanctions have an amiguous impact on the equilibrium employment rate. The model is simulated for Belgium. The simulations suggest that passive and active labor market policies do not have a substantial net impact on the employment rate.labor market policies; sanctions; equilibrium search model; matching function

The net effect of unemployment benefits, sanctions and training on regular employment

This paper measures the impact of labor market policies (LMPs) on regular employment. Contrary to previous empirical studies, we conduct an econometric analysis based on sound theoretical foundations. The specification is based on an equilibrium job search model where LMPs affect tightness on the labor market. The impacts of a comprehensive set of LMPs on the regular employment rate and on wages are jointly estimated. Taking care of the endogeneity of LMPs, our results for Belgium indicate that unemployment benefits have a positively and small impact on wages and a negative one on the employment rate. The rate of sanctions has a small negative effect on wages. Their impact on the employment rate is however negative. This can be understood if the efficiency of the sanctioned in the matching process is sufficiently lower than the one of the insured unemployed. Training programmes have a small negative effect on wages and a small positive one on employment. Our analysis also shows that the results can be sensitive to the choice made about the exogeneity of LMPs.evaluation; labor market policies; wage bargaining; equilibrium unemployment; equilibrium search

Flexicurity in Belgium: A Proposal Based on Economic Principles

The current unemployment insurance and employment protection legislation were set up in an economic environment in which relationships between workers and firms were typically long-lasting and stable. The increasing globalisation of the economy and the rapid technological and organisational changes require more flexibility of both workers and firms leading to career paths which are much more volatile both within and between firms. Current institutions must be therefore urgently reformed to reconcile this new need of more flexibility with that of security for workers. The call for “flexicurity” is not new, but there is no unanimity on the corresponding institutional model it implies. Rather than proposing a reform on the basis of existing institutions abroad, we propose a reform that is explicitly guided by economic principles. In a nutshell, we propose to transform the bulk of the advance notice payments by a unique lay-off contribution, independently of the type of worker (blue or white-collar) and type of contract (temporary or open-ended). A severance payment, less important than the lay-off contribution, is due to cover the psychic cost related to dismissal. In order to make the employer accountable for the costs he imposes on society, the lay-off contribution should be made proportional to the cumulative past earnings since the moment that the worker was hired in the firm. This contribution would be used not only to finance a supplement to the current unemployment benefits, but also, as to make the worker more accountable, to finance active labour market policies for the unemployed. Aside of this scheme, it makes sense to generalise the current scheme of temporary unemployment benefits for blue-collar workers to white-collar workers, but only to the extent that one introduces experience rating in the funding, so that again the employers are made accountable for the social costs that they induce by these temporary lay-offs.lexicurity, employment protection, unemployment insurance, active labour market policies, optimal design