Job search costs and incentives
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Job search costs and incentives Andriy Zapechelnyuk1 · Ro’i Zultan2 Received: 14 May 2019 / Accepted: 3 September 2019 © Society for the Advancement of Economic Theory 2019
Abstract We demonstrate that policies aimed at reducing frictional unemployment may lead to the opposite results. In a labor market with long-term wage contracts and moral hazard, any such policy reduces employees’ opportunity costs of staying on a job. As employees are less worried about losing their job, a smaller share of employees is willing to exert effort, leading to a lower average productivity. Consequently, firms create fewer vacancies, resulting in lower employment and decreased welfare. Keywords Job search · Moral hazard · Labor market · Unemployment insurance JEL Classification D82 · J64 · J65
1 Introduction Mechanisms that target reduction of out-of-pocket expenses (or increase of disposable income) of job seekers but have no effect on the job matching technology are popular in many countries and appear in various forms.1 The costs associated with active job search are closely linked to job market participation, as they deter potential workers from active search, increase unemployment spells, and thus reduce welfare (Pries and Rogerson 2009). Accordingly, mechanisms designed to mitigate these costs are typically seen as means to reduce frictions and to provide betterincentives for participation
1 Prominent examples are tax deductibility for job search expenses in the US (IRS Publication 529, 2011, p. 5; see also Garrison and Cummings 2010), and unemployment benefit programs with provisions that an individual maintains the status of “job seeker” such as Jobseeker’s Allowance (UK), Newstart Allowance (Australia), Employment Insurance (Canada), and the Unemployment Benefit (New Zealand), to name a few.
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Ro’i Zultan [email protected] Andriy Zapechelnyuk [email protected]
1
School of Economics and Finance, University of St Andrews, St Andrews KY16 9AR, UK
2
Department of Economics, Ben-Gurion University of the Negev, P.O. Box 653, 84105 Beer-Sheva, Israel
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A. Zapechelnyuk, R. Zultan
in the job market (Grubb 2001), or for avoiding unsuitable jobs, thus increasing the job matching efficiency (Chetty 2008). The introduction of the UK Jobseeker’s Allowance in 1996, for example, was to some extent aimed at increasing search intensity among the unemployed and, consequently, the flow into employment (Rayner et al. 2000). However, although the search intensity of job seekers increased as a result, this could be attributed to weeding out of low-intensity job seekers, who opt out of the job market (Manning 2009). Therefore, the social implications of benefit programs for job seekers appear to be non-trivial. We demonstrate that, counterintuitively, jobseeker benefits and policies that target reduction of job search costs may have welfare damaging effect and, moreover, may lead to a collapse of the labor market if taken to the extreme.2 Our model is applicable to labor markets with long-term wage contracts where an employee’s pe
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