Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129517
Authors: 
Jung, Philip
Kuester, Keith
Year of Publication: 
2011
Series/Report no.: 
Working Paper Series, Department of Economics, University of Mannheim 11-1
Abstract: 
We examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort we first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. We derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Our propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. We find this confirmed in a calibration targeted to the U.S. economy.
Subjects: 
unemployment
search and matching
endogenous separations
JEL: 
E32
E24
J64
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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