Unemployment Compensation Finance and Labor Market Rigidity

27 Pages Posted: 21 Oct 2002

See all articles by Pierre Cahuc

Pierre Cahuc

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA); University of Angers - French National Center for Scientific Research (CNRS); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Franck Malherbet

ENSAE; Universite Paris I Pantheon-Sorbonne

Date Written: September 2002

Abstract

The systematic use of experience rating is an original feature of the U.S. unemployment benefit system. In most states, unemployment benefits are financed by taxing firms in proportion to their separations. Experience rating is a way to require employers to contribute to the payment of unemployment benefits they create through their firing decisions. It is striking that experience rating is absent from the unemployment compensation systems of other OECD countries, where benefits are usually financed by taxes on payrolls, paid by employers or employees, and by government contributions (Holmlund, 1998). Is experience rating only adapted to the U.S. labor market? Would it be suitable in other countries? At first glance, it is likely that experience rating is not desirable in many European labor markets characterized by high firing costs. We provide a simple matching model of a rigid labor market including firing costs, temporary jobs and a minimum wage in order to analyze the issue. Our analysis leads us to argue that experience rating is likely to reduce unemployment and to improve the welfare of low skilled workers in France, and more generally for low skilled workers in a typical rigid Continental European labor market.

Keywords: Unemployment Benefits, Job Protection, Matching Models

JEL Classification: J41, J64, J65

Suggested Citation

Cahuc, Pierre and Malherbet, Franck, Unemployment Compensation Finance and Labor Market Rigidity (September 2002). IZA Discussion Paper No. 581. Available at SSRN: https://ssrn.com/abstract=340302

Pierre Cahuc (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE) ( email )

92245 Malakoff Cedex
France

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA) ( email )

106-112 Boulevard de l'Hopital
Paris Cedex 13, 75647
France
+33 1 4117 3717 (Phone)
+33 1 4117 3724 (Fax)

HOME PAGE: http://eurequa.univ-paris1.fr/membres/cahuc/

University of Angers - French National Center for Scientific Research (CNRS)

106-112 Boulevard de l'Hopital
75647 Paris Cedex 13
France
+33 4 44 07 82 06 (Phone)
+33 4 44 07 82 02 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

Franck Malherbet

ENSAE ( email )

92245 Malakoff Cedex
France

Universite Paris I Pantheon-Sorbonne

15 Boulevard Gabriel Peri
92245 Malakoff Cedex
France
+33 1 4117 3550 (Phone)
+33 1 4117 7634 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
81
Abstract Views
1,003
rank
303,176
PlumX Metrics