Unemployment Insurance and Job Reallocation

Franck Malherbet, CREST-INSEE and University Paris I-EUREQua
Mustafa Ulus, University Paris I-EUREQua and University of Galatasaray

In this paper, we aim at providing a theoretical framework and some simulations investigating the impact of unemployment insurance on the allocation of labor across industries characterized by di.erent rates of labor turnover. We build an equilibrium search and matching model of a segmented labor market where the size of each sector is endogenously determined. In equilibrium, size of the each sector is determined by an arbitrage rule such that expected returns to unemployment is equal in all of the sectors. Job creation and destruction decisions are also endogenous. In our framework, a change in the discounted utility streams of the workers induced by unemployment insurance leads to a reallocation of labor. Furthermore, our analysis leads us to argue that with a lump sum taxation system more generous unemployment payments increase the implicit subsidy to volatile sectors leading a flow of workers towards these sectors. On the contrary, a switch from a lump sum tax system to an experience rated system allow to reduce the implicit subsidy to layo.s and therefore to stabilize employment by reducing the size of the volatile sectors.