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How does imperfect competition in the labor market affect unemployment policies

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  • WAUTHY, Xavier
  • ZENOU, Yves

Abstract

We consider a continuum of workers ranked according to their ability to acquire education, and two firms with different technologies that compete imperfectly in wages to attract these workers. Once employed, each worker bears an education cost proportional to their initial ability, this cost being higher in the high-technology firm. At the Nash equilibrium, we show that unemployed workers are those with the lowest initial abilities. We then study different policies that subsidy either the education cost or wages and compare them. We found that the first best allocation can only be implemented by selective policies. We then analyse second best non-selective policies that do not discriminate between workers and firms and show that, in terms of welfare, subsidizing education costs or wages is strictly equivalent.
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Suggested Citation

  • WAUTHY, Xavier & ZENOU, Yves, 2002. "How does imperfect competition in the labor market affect unemployment policies," LIDAM Reprints CORE 1558, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:1558
    DOI: 10.1111/1467-9779.00106
    Note: In : Journal of Public Economic Theory, 4(3), 417-436, 2002.
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    References listed on IDEAS

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    1. Jellal, Mohamed & Thisse, Jacques-Francois & Zenou, Yves, 2005. "Demand uncertainty, mismatch and (un)employment," Economics Letters, Elsevier, vol. 88(1), pages 33-39, July.
    2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
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    Cited by:

    1. Mohamed Jellal & Francois-Charles Wolff, 2003. "Dual Labor Markets And Strategic Efficiency Wage," International Economic Journal, Taylor & Francis Journals, vol. 17(3), pages 99-112.
    2. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Straume, 2004. "Good Jobs, Bad Jobs and Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 703-720, December.
    3. Tasnadi, Attila, 2005. "A way of explaining unemployment through a wage-setting game," Labour Economics, Elsevier, vol. 12(2), pages 191-203, April.

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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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