Reforming Labor Market Institutions: Unemployment Insurance and Employment Protection

29 Pages Posted: 19 Nov 2004

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

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

Date Written: November 10, 2004

Abstract

This paper explores the characteristics of both optimal and actual unemployment insurance and employment protection. It then sketches potential paths for reforms in both rich and middle-income countries. It reaches three main conclusions:

There is a role for both state-provided unemployment insurance and employment protection.

In rich countries, one challenge is to combine unemployment insurance with strong incentives for the unemployed to take jobs. Financial incentives are unlikely to be enough at the low end of the wage scale. The other challenge is to redefine employment protection by reducing administrative constraints and judicial intervention, and relying more on financial incentives.

In middle-income countries, the main challenge is to move from the current system of high severance payments and employment protection to a system of state-provided unemployment benefits and lower severance payments.

Keywords: Unemployment insurance, Employment protection, unemployment benefits, layoff taxes, layoffs, severance payments, informal sector

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

Suggested Citation

Blanchard, Olivier J., Reforming Labor Market Institutions: Unemployment Insurance and Employment Protection (November 10, 2004). MIT Department of Economics Working Paper No. 04-38. Available at SSRN: https://ssrn.com/abstract=618341 or http://dx.doi.org/10.2139/ssrn.618341

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

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