Deposit-Refund on Labor: A Solution to Equilibrium Unemployment?

19 Pages Posted: 30 Jan 2006

See all articles by Ben J. Heijdra

Ben J. Heijdra

University of Groningen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics; University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2000

Abstract

The paper studies the employment effects of a deposit-refund scheme on labor in a simple search-theoretic model of the labor market. It is shown that if a firm pays a deposit to the government when it fires a worker, to be refunded when it employs the same or another worker, the vacancy rate increases and the unemployment rate declines. However, the scheme introduces rigidities in the labor market that may be undesirable in countries wanting to liberalize their labor markets.

Keywords: deposit-refund schemes, firing costs, hiring subsidies, job search, unemployment

JEL Classification: J3, J680

Suggested Citation

Heijdra, Ben J. and Ligthart, Jenny E., Deposit-Refund on Labor: A Solution to Equilibrium Unemployment? (January 2000). IMF Working Paper No. 00/9. Available at SSRN: https://ssrn.com/abstract=879325

Ben J. Heijdra (Contact Author)

University of Groningen - Department of Economics ( email )

P.O. Box 800
9700 AV Groningen
Netherlands
+31 50 363 7303 (Phone)
+31 50 363 7337 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 8755 (Phone)
+31 13 466 4032 (Fax)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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