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This paper develops a general equilibrium model with unemployment and noncooperative wage determination to analyze the importance of incomplete markets when risk-averse agents are subject to idiosyncratic employment shocks. A version of the model calibrated to the U.S. shows that market incompleteness affects individual behavior and aggregate conditions: it reduces wages and unemployment but increases vacancies. Additionally, the model explains the average level of unemployment insurance observed in the U.S. A key mechanism is the joint influence of imperfect insurance and risk aversion in the wage bargaining. The paper also proposes a novel solution to solve this heterogeneous-agent model.
In labor market equilibrium, sectoral differences in natural rates of unemployment generate a conformable distribution of wage differentials that compensate workers for bearing unemployment risk. This paper offers new empirical evidence on the determinants of the equilibrium. The analysis consists of two stages. First, I estimate a three-state model of employment and unemployment that identifies the determinants of individuals' rates of entering and leaving employment spells. Sectoral and policy-induced differences in unemployment probabilities evolve naturally from this framework. Second, I estimate the impact of these differences on the distribution of wages. An important finding is the powerful impact of the unemployment insurance (UI) system both on unemployment and on equalizing wage differences. The evidence is strong that the availability of UI increases unemployment, while simultaneously reducing the magnitude of compenstaing wage differentials. Neglect of the role of UI as a substitute for wages partially accounts for the small compensating differentials estimated in previous research.
First published in 1986, Insurance for Unemployment proposes a radical approach to the reform of unemployment and social insurance. The book develops the ethical, economic and actuarial case for the proposed reforms, whereby the individual pays the contributions which reflect the unemployment risk that he wishes to insure. Such ideas provide a libertarian alternative to the social security systems that have been adopted by most countries in the world based on Beveridge’s conception of social insurance, and the book provides an original basis for privatising unemployment insurance. Conventional acceptance of the welfare state is challenged, while the book stands as a landmark in relating market principles to issues of social policy.
We study the effects of income risk and unemployment risk on individual wages simultaneously. Starting point for the empirical analysis is a portfolio model for the labor market. This model shows positive wage effects for both risks but also a negative interaction effect. Using German administrative panel data we estimate the effects of the income risk, the unemployment risk and their interaction on individual wages separately for men and women in East and West Germany. We find the expected positive wage effects for both risks as well as a negative interaction effect. The marginal effect of income risk on wages is positive, whereas the marginal effect of unemployment risk is negative.
There is relatively little prior evidence on the potential impact of rank and file employees on financial reporting choices outside union negotiations. We contribute to the literature by providing new evidence that firms appear to manage long-run earnings upward in order to manage employee perceptions of employment security. In particular, we exploit exogenous state-level changes in unemployment insurance benefits and test for unwinding of prior upward earnings management when benefits increase. An increase in unemployment benefits makes unemployment relatively less costly and reduces employees' unemployment risk, thereby reducing firms' upward earnings management incentives. Consistent with the hypothesis, we find a significant reduction in abnormal accruals, increased recognition of special items and writedowns, and greater downward restatement likelihood, following an increase in state-level unemployment benefits. Cross-sectional tests suggest greater unwinding of prior upward earnings management for firms with higher labor intensity, higher layoff propensity and a higher percentage of low-wage workers. Collectively the results provide new evidence of the impact of rank and file employees on firms' financial reporting choices.
With the aim to provide guidelines for countries wishing to introduce or improve income support systems for the unemployed, the book summarizes the evidence about the performance of five such systems: unemployment insurance, unemployment assistance, unemployment insurance savings accounts, severance pay, and public works. These systems are evaluated by two sets of criteria: (i) performance criteria, evaluating how well these systems work A? how they protect incomes and what other, particularly efficiency related, effects they may have; and (ii) design and implementation criteria, evaluating how these systems fit the country A? how suitable are these programs given country-specific conditions, chief among them being labor market and other institutions, the capacity needed for administering income support programs, the size of the informal sector, and prevalence of private transfers. Income Support Systems for the Unemployed also offers summary evaluations of alternative systems by describing the strengths and weaknesses of each system and pointing out the country specific circumstances which are particularly conducive to performance.
Search Theory and Unemployment contains nine chapters that survey and extend the theory of job search and its application to the problem of unemployment. The volume ranges from surveys of job search theory that take microeconomic and macroeconomic perspectives to original theoretical contributions which focus on the externalities arising from non-sequential search and search under imperfect information. It includes a clear and authoritative survey of econometric methods that have been developed to estimate models of job search, as well as two lucid contributions to the empirical search literature. Finally, it includes a study that reviews and extends the literature on optimal unemployment insurance and concludes with an appraisal of the influence of search theory on the thinking of macroeconomic policymakers.