The joint design of unemployment insurance and employment protection
Subtitle: a first pass
By: Olivier Blanchard [and] Jean Tirole
Contributors: Tirole, Jean; Massachusetts Institute of Technology. Dept. of Economics
Edition: Rev.
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-15, Revised; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-15.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Number of pages: 32
Description: Unemployment insurance and employment protection are typically discussed and studied in isolation. In this paper, we argue that they are tightly linked, and we focus on their joint optimal design. We start our analysis with a simple benchmark, with risk averse workers, risk neutral firms, and random shocks to productivity. In this benchmark, we show that unemployment insurance comes with employment protection - in the form of layoff taxes; indeed, optimality requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and ex-ante heterogeneity of firms or workers. We show how the design must be modified in each case. The scope for insurance may be more limited than in the benchmark; so may the scope for employment protection. The general principle remains however, namely the need to look at unemployment insurance and employment protection together, rather than in isolation. Keywords: Unemployment insurance, employment protection, unemployment benefits, layoff taxes, layoffs, severance payments. JEL Classifications: D60, E62, H21, J30, J32, J38, J65.
Notes: "April 1, 2004. -- Revised: November 11, 2005."

Includes bibliographical references (p. 30-31).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.