Template-Type: ReDIF-Paper 1.0
Author-Name: Athanasios Geromichalos
Author-Name-First: Athanasios
Author-Name-Last: Geromichalos
Author-Workplace-Name: Department of Economics, University of California Davis
Title: Unemployment Insurance and Optimal Taxation in Search Models of the Labor Market
Abstract: In many search models of the labor market, unemployment insurance (UI) is conveniently
 interpreted as the value of leisure or home production and is, therefore,
 treated as a parameter. However, in reality, UI has to be funded through taxation
 that might be distortionary. In this paper, I analyze the welfare implications of
 different taxation systems within two equilibrium models of unemployment: random
 search and directed search. In a random search model without taxes, efficiency
 is typically not achieved, unless the so-called Hosios condition is satisfied. If the
 bargaining power of firms is large, a lump-sum tax can discourage firms from entering
 and improve welfare. In a directed search model without taxes, constrained
 efficiency is always achieved. Since firms ?direct? workers to apply to them by
 posting wages, raising UI funds in a lump-sum manner always distorts the efficient
 allocation, as it gives firms an incentive to be excessively aggressive in their attempt
 to maximize the probability of filing up their vacancies. I discuss two ways through
 which this externality can be internalized and efficiency can be re-established.
Length: 30
File-URL: https://repec.dss.ucdavis.edu/files/W5zXHTc6eA3dexAE5dLp57ue/12-18.pdf
File-Format: application/pdf
Number: 174
Classification-JEL: 
KeyWords: Directed Search, Random Search, Unemployment Insurance, Optimal Taxation
Creation-Date: 20120923
Handle: RePEc:cda:wpaper:174