Seminar Papers,
Stockholm University, Institute for International Economic Studies

Abstract: We develop an equilibrium search-matching model with risk-neutral agents and two-sided ex-ante heterogeneity. Unemployment insurance has the standard effect of reducing employment, but also helps workers to get a suitable job. The predictions of our simple model are consistent with the contrasting performance of the labour market in Europe and US in terms of unemployment, productivity growth and wage inequality. To show this, we construct two fictious economies with calibrated parameters which only differ by the degree of unemployment insurance and assume that they are hit by a common technological shock which enhances the importance of mismatch. This shock reduces the proportion of jobs which workers regard as acceptable in the economy with unemployment insurance (Europe). As a result, unemployment doubles in this economy. In the laissez-faire economy (US), unemployment remains constant, but wage inequality increases more and productivity grows less due to larger mismatch. The model is used to adress some political economy issues.

Keywords: Unemployment; Productivity; Mismatch; Ex-ante Heterogeneity; Search; Unemployment Benefits; Efficiency; Inequality

JEL-codes: D33; J64; J65

41 pages, November 20, 1998

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