Abstract
We demonstrate that policies aimed at reducing frictional unemployment may lead
to the opposite results. In a labor market with long-term wage contracts and moral
hazard, any such policy reduces employees’ opportunity costs of staying on a job.
As employees are less worried about losing their job, a smaller share of employees is willing to exert effort, leading to a lower average productivity. Consequently, firms create fewer vacancies, resulting in lower employment and decreased welfare.
to the opposite results. In a labor market with long-term wage contracts and moral
hazard, any such policy reduces employees’ opportunity costs of staying on a job.
As employees are less worried about losing their job, a smaller share of employees is willing to exert effort, leading to a lower average productivity. Consequently, firms create fewer vacancies, resulting in lower employment and decreased welfare.
Original language | English |
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Journal | Economic Theory Bulletin |
Volume | First Online |
Early online date | 10 Sept 2019 |
DOIs | |
Publication status | E-pub ahead of print - 10 Sept 2019 |
Keywords
- Job search
- Moral hazard
- Labor market
- Unemployment insurance