The Joint Design of Unemployment Insurance and Employment Protection: A First Pass

39 Pages Posted: 19 May 2008

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2007

Abstract

Unemployment insurance and employment protection are typically discussed and studied in isolation. ln this paper, we argue that they are tightly linked, and we focus on their joint optimal design in a simple model, with risk averse workers, risk neutral firms, and random shocks to productivity. We show that, in the 'first best', 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 from first best: 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. Finally, we draw out the implications of our analysis for current policy debates and reform proposals, from the financing of unemployment insurance, to the respective roles of severance payments and unemployment benefits.

Keywords: Employment protection, experience rating, layoff taxes, layoffs, severance payments, unemployment benefits, unemployment insurance

JEL Classification: D60, E62, H21, J30, J32, J38, J65

Suggested Citation

Blanchard, Olivier J. and Tirole, Jean, The Joint Design of Unemployment Insurance and Employment Protection: A First Pass (February 2007). CEPR Discussion Paper No. DP6127. Available at SSRN: https://ssrn.com/abstract=1133772

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Place Anatole France
21 Allees de Brienne
F-31042 Toulouse Cedex
France
+33 5 61 12 8642 (Phone)
+33 5 61 12 8637 (Fax)

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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