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Optimal unemployment benefits financing scheme, search frictions and real wage rigidities

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  • Julien Albertini
  • Xavier Fairise

Abstract

In this paper we feature the optimal unemployment benefits financing scheme when the economy is subject to labor market failures. We are particulary interested in the effects of search frictions and wages rigidity. The goal of this paper is to show how policy instruments should interact with labor market imperfections. Taking inspiration from the US unemployment insurance system, we wonder if firms should be taxed in proportion of their layoffs to finance the cost incurred by the unemployment benefit fund. The welfare gains and the stabilizing effects of such a policy are evaluated. We find that an optimal combination of unemployment benefits and layoff taxes is welfare-enhancing and can improve labor market performances. Search externalities and wage rigidities cause sizeable welfare losses and influence the optimal design of the financing scheme. Without wage rigidities the efficient layoff tax corresponds to the expected fiscal cost of an unemployed worker. Conversely, when wages are rigid, the cost firms should support is much higher.

Suggested Citation

  • Julien Albertini & Xavier Fairise, 2009. "Optimal unemployment benefits financing scheme, search frictions and real wage rigidities," 2009 Meeting Papers 1259, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:1259
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