How Does Imperfect Competition in the Labor Market Affect Unemployment Policies?

25 Pages Posted: 14 Aug 2001

See all articles by Xavier Wauthy

Xavier Wauthy

University St. Louis; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Yves Zenou

Stockholm University; Monash University - Department of Economics; Research Institute of Industrial Economics (IUI); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: August 2001

Abstract

We consider a continuum of workers ranked according to their ability to acquire education, and two firms with different technologies that compete imperfectly in wages to attract these workers. Once employed, each worker bears an education cost proportional to their initial ability, this cost being higher in the high-technology firm. At the Nash equilibrium, we show that unemployed workers are those with the lowest initial abilities. We then study different policies that subsidy either the education cost or wages and compare them. We found that the first best allocation can only be implemented by selective policies. We then analyze second best non-selective policies that do not discriminate between workers and firms and show that, in terms of welfare, subsidizing education costs or wages is strictly equivalent.

Keywords: Nash equilibrium in wages, heterogeneous workers and firms, education, unemployment policies

JEL Classification: H20, J31, L13

Suggested Citation

Wauthy, Xavier and Zenou, Yves and Zenou, Yves, How Does Imperfect Competition in the Labor Market Affect Unemployment Policies? (August 2001). Available at SSRN: https://ssrn.com/abstract=279389

Xavier Wauthy (Contact Author)

University St. Louis ( email )

43 Boulevard du Jardin Botanique
Brussels
Belgium
+32 2 211 7949 (Phone)
+32 2 211 7997 (Fax)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Yves Zenou

Monash University - Department of Economics ( email )

Australia

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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