Discussion Paper No. 581 - Forschungsinstitut zur Zukunft der Arbeit

Discussion Paper No. 581 - Forschungsinstitut zur Zukunft der Arbeit

DISCUSSION PAPER SERIES
IZA DP No. 581
Unemployment Compensation Finance and
Labor Market Rigidity
Pierre Cahuc
Franck Malherbet
September 2002
Forschungsinstitut
zur Zukunft der Arbeit
Institute for the Study
of Labor
Unemployment Compensation Finance
and Labor Market Rigidity
Pierre Cahuc
Université Paris 1-EUREQua, CREST, CEPR and IZA Bonn
Franck Malherbet
Université Paris 1-EUREQua and CREST
Discussion Paper No. 581
September 2002
IZA
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IZA Discussion Paper No. 581
September 2002
ABSTRACT
Unemployment Compensation Finance and
Labor Market Rigidity*
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.
JEL Classification:
Keywords:
J41, J64, J65
unemployment benefits, job protection, matching models
Corresponding author:
Pierre Cahuc
Université Paris 1- EUREQua
Panthéon-Sorbonne
106-112 Boulevard de l'Hôpital
75013 Paris
France
E-mail: cahuc@univ-paris1.fr
*
We thank Paul Beaudry, Jean-Pascal Benassy, Etienne Lehmann, Olivier L’Haridon, and André
Zylberberg.
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wkh oderu pdunhw wljkwqhvv1 Wkh mre ghvwuxfwlrq fxuyh kdv d srvlwlyh vorsh/ ehfdxvh dq lqfuhdvh
lq wkh oderu pdunhw wljkwqhvv whqgv wr lpsuryh zrunhuv* rxwvlgh rssruwxqlwlhv/ dqg/ wkhuhiruh/
wr udlvh wkh h{lw udwh iurp xqhpsor|phqw/ wkh h{shfwhg xwlolw| ri xqhpsor|hg zrunhuv/ dqg
zdjhv1 Wkxv/ li wkh oderu pdunhw wljkwqhvv lv udlvhg/ wkh h{shfwhg surwv duh idoolqj r dqg wkh
uhvhuydwlrq surgxfwlylw| lv lqfuhdvhg/ vr wkdw pruh mrev duh whuplqdwhg1
Qrz/ ohw xv orrn dw wkh frqvhtxhqfhv ri d ulvh lq h{shulhqfh udwlqj1 Wkhvh frqvhtxhqfhv
duh ghslfwhg rq Iljxuh 41 Lw lqgxfhv d pryh iurp vwhdg| vwdwh htxloleulxp D wr vwhdg| vwdwh
htxloleulxp E1 Dq lqfuhdvh lq h{shulhqfh udwlqj ghfuhdvhv wkh mre uhvhuydwlrq surgxfwlylw| {r
iru dq| jlyhq ydoxh ri wkh oderu pdunhw wljkwqhvv/ zklfk fruuhvsrqgv wr dq xszdug pryh ri wkh
mre ghvwuxfwlrq fxuyh1 Iurp wklv srlqw ri ylhz/ h{shulhqfh udwlqj dfwv olnh d ulqj frvw wkdw
fuhdwhv oderu krduglqj1 Lw fdq dovr eh fkhfnhg wkdw h{shulhqfh udwlqj ghfuhdvhv mre fuhdwlrq/
ehfdxvh lw lqfuhdvhv wkh frvw ri mre ghvwuxfwlrq1 Dffruglqjo|/ wkh mre fuhdwlrq fxuyh lv vkliwlqj
grzq/ dv vkrzq e| Iljxuh 41 Rqh pxvw nhhs lq plqg wkdw wklv phfkdqlvp wdnhv dffrxqw ri wkh
exgjhw htxloleulxp ri wkh xqhpsor|phqw frpshqvdwlrq v|vwhp/ zklfk glhuv iurp wkh dqdo|vlv
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pdunhw wljkwqhvv1 Wkhuhiruh/ lwv hhfw rq xqhpsor|phqw lv dpeljxrxv dqg lw lv qhfhvvdu| wr qh
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+<,/ +47, dqg +48, lpso| wkdw dq lqfuhdvh lq E> zklfk pryhv wkh mre ghvwuxfwlrq fxuyh wrzdugv wkh
erwwrp lq Iljxuh 4/ hqwdlov dq lqfuhdvh lq wkh xqhpsor|phqw udwh1 Pruh irupdoo|/ rqh jhwv= 3 ?
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srvlwlyh ydoxhv ri xqhpsor|phqw ehqhwv/ wkh mre ghvwuxfwlrq udwh lv wrr kljk lq wkh devhqfh ri
h{shulhqfh udwlqj/ ehfdxvh xqhpsor|phqw ehqhwv lqgxfh d glvfuhsdqf| ehwzhhq wkh vrfldo ydoxh
ri mrev vxusoxv/ zklfk rewdlqv e| frpsdulvrq ri wkh surgxfwlylw| ri wkh mre/ {> wr wkh surgxfwlylw|
rxwvlgh wkh pdunhw/ }> dqg wkh sulydwh ydoxh ri mrev vxusoxv/ zklfk lv ghulyhg iurp wkh frpsdulvrq
ri wkh mre surgxfwlylw| iuhh ri wd{hv/ { > wr wkh zrunhuv uhvhuydwlrq zdjh/ e . }= Lq rughu wr
pdnh wklv srlqw fohdu/ ohw xv frqvlghu/ iru wkh vdnh ri vlpsolflw|/ d vwdwlf hqylurqphqw1 Lq wkdw
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lpso| wkdw wkh| ghvwur| mrev vxfk wkdw { ? } . e= Dffruglqjo|/ lw dsshduv wkdw xqhpsor|phqw
ehqhwv lqgxfh d glvfuhsdqf| ehwzhhq wkh sulydwh dqg wkh hflhqw mre ghvwuxfwlrq ghflvlrqv iru
wzr uhdvrqv1 Iluvw/ wkh vfdo h{whuqdolw|/ vwuhvvhg e| Ihogvwhlq +4<:9,/ dulvhv/ vlqfh hpsor|huv
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45
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lv lqfuhdvhg e| xqhpsor|phqw ehqhwv1 Wklv dovr ohdgv wr wrr pdq| mre ghvwuxfwlrqv1 Iru wkhvh
wzr uhdvrqvD/ wkh mre ghvwuxfwlrq udwh lv wrr kljk li wkhuh duh srvlwlyh xqhpsor|phqw ehqhwv dqg
qr h{shulhqfh udwlqj lq wkh h{leoh hfrqrp|1 Wkdw lv zk| lw lv zruwk xvlqj h{shulhqfh udwlqj1
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iru d odujh udqjh ri sodxvleoh sdudphwhuv ydoxhv1
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pdunhw prgho iru wkh X1V1/ lq wkh olqh ri Pruwhqvhq dqg Slvvdulghv +4<<<d/e,1 D pdwfklqj
ixqfwlrq ri wkh Free0Grxjodv irup lv dvvxphg/ vxfk wkdw p+y> x, @ yfDxfD= Wkh glvwulexwlrq
ri lglrv|qfudwlf vkrfnv lv dvvxphg wr eh xqlirup rq wkh vxssruw ^3> 4` = Wkh surgxfwlylw| rq qhz
mrev {f lv zruwk 3=: dqg wkh dyhudjh surgxfwlylw| iru mrev douhdg| klw e| vkrfnv dprxqwv wr
3=;4= Wklv lv lq dffrugdqfh zlwk wkh dvvxpswlrq vwdwlqj wkdw surgxfwlylw| lqfuhdvhv zlwk mre
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ri wkh prgho pdwfk uhdvrqdeoh ydoxhv iru wkh xqhpsor|phqw udwh/ wkh xqhpsor|phqw vshoo/ wkh
mre ghvwuxfwlrq udwh dqg wkh uhsodfhphqw udwlr1 Qdpho|/ wkh edvholqh sdudphwhuv ydoxh xvhg lq
rxu frpsxwdwlrqdo h{huflvh/ uhsruwhg lq Wdeoh 4/ dlpv dw pdwfklqj wkh X1V1 oderu pdunhw iru
orz vnloohg zrunhuv zkrvh hgxfdwlrq dwwdlqphqw lv qr pruh wkdq d kljk vfkrro glsorpd1 Iru
wkrvh zrunhuv/ wkh xqhpsor|phqw udwh dyhudjhv derxw ;=8( lq 5334 +Exuhdx ri Oderu Vwdwlvwlfv/
5335,1 Wkh xqhpsor|phqw vshoo dprxqwv wr d elw ohvv wkdq rqh txduwhu dqg wkh uhsodfhphqw
udwlr/ e@z> zruwk 88( +zklfk lv frpsdwleoh zlwk wkh dyhudjh qhw uhsodfhphqw udwlr iru wkh X1V1
dffruglqj wr wkh RHFG gdwd= Pduwlq/ 4<<9,/ zklfk lpsolhv wkdw E @ 3=3651 Lw vkrxog eh
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rwkhu fdoleudwlrqv ri pdwfklqj prghov +Ploodug dqg Pruwhqvhq/ 4<<:/ Pruwhqvhq dqg Slvvdulghv/
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lq wkh X1V1 hfrqrp| ryhu wkh |hduv 4<;; 4<<: +XLSO/ 4<<<,1
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dsso|lqj wr doo mrev lq wkh h{leoh hfrqrp|/ iru wkh ehqfkpdun ydoxh ri wkh exgjhwS/ E @ 3=3651
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iurp fkdqjhv lq wkh xqhpsor|phqw udwh1 Iljxuh 5 vkrzv wkdw xqhpsor|phqw lv plqlpl}hg iru
d ghjuhh ri h{shulhqfh udwlqj juhdwhu wkdq rqh dqg odujhu wkdq wkh dfwxdo ghjuhh ri h{shulhqfh
udwlqj lq wkh XV hfrqrp|1 Wklv uhvxow lv lq dffrugdqfh zlwk Ihogvwhlq +4<:9, zkr dujxh wkdw
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udwlqj lqgxfhv d uhodwlyho| vpdoo lpsdfw rq wkh xqhpsor|phqw udwh wkdw ghfuhdvhv iurp ;=8:(/
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Ph|hu +5333, qglqjv/ dffruglqj wr zklfk h{shulhqfh udwlqj kdv d yhu| zhdn lpsdfw rq dyhudjh
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d jlyhq uhsodfhphqw udwlr e,1 Wklv gurs lq wkh sd|uroo wd{ lqfuhdvhv surwv dqg lv wkhuhiruh
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0.086
0.0858
Unemployment
0.0856
0.0854
0.0852
0.085
0.0848
0
0.2
0.4
0.6
0.8
Experience Rating Index
1
1.2
1.4
Iljxuh 5= H{shulhqfh udwlqj dqg xqhpsor|phqw lq wkh h{leoh hfrqrp|1
0.12
0.115
Unemployment
0.11
0.105
0.1
0.095
0.09
0.085
0
0.2
0.4
0.6
0.8
Firing Costs
1
1.2
1.4
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48
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frpsxwdwlrqdo h{huflvhv phdqw wr xqghuolqh wkh surshuwlhv ri rxu prgho zkhq ulqj frvwv ru d
plqlpxp zdjh duh lqwurgxfhg lq rxu ehqfkpdun hfrqrp|1 Wkhq/ zh hydoxdwh wkh frqvhtxhqfh
ri h{shulhqfh udwlqj rq d vshflf oderu pdunhw/ qdpho| wkh Iuhqfk oderu pdunhw/ zklfk kdv
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h{shulhqfh udwlqj zkhq wkhuh duh kljk ulqj frvwv1 Wklv srlqw lv looxvwudwhg e| Iljxuh 7/ zklfk
uhsuhvhqwv wkh frqvhtxhqfhv ri h{shulhqfh udwlqj./ zkhq ulqj frvwv wkdw dprxqw wr wkh ohyho
phw rq wkh Iuhqfk oderu pdunhw +vhh ehorz, duh lqwurgxfhg lq wkh ehqfkpdun h{leoh hfrqrp|1
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doo mrev idfh ulqj frvwv wkdw zruwk 83( ri wkh dyhudjh |hduo| zdjh1 Rqh fdq vhh wkdw h{shulhqfh
udwlqj lv qrw dq| pruh xvhixo wr ghfuhdvh xqhpsor|phqw +dq wkhuhiruh lpsuryh zhoiduh, zkhq
wkhuh duh surwhfwlrq ohyhov vlplodu wr wkrvh phw lq Frqwlqhqwdo Hxursh1 Pruh jhqhudoo|/ lw dsshduv
wkdw wkh rswlpdo ghjuhh ri h{shulhqfh udwlqj ghfuhdvhv zlwk wkh ohyho ri mre surwhfwlrq/ dqg fdq
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ghuvwrrg lq rxu vlpsoh iudphzrun1 Ohw xv dvvxph wkdw d plqlpxp zdjh lv lqwurgxfhg lq wkh
h{leoh oderu pdunhw/ zlwkrxw dq| ulqj frvw1 Lw fdq eh xqghuvwrrg wkdw h{shulhqfh udwlqj fdq
lpsuryh hflhqf| iru wzr uhdvrqv1 Iluvw/ wkh plqlpxp zdjh lqfuhdvhv wkh pdvv ri lqhflhqw mre
ghvwuxfwlrqv/ zlwk srvlwlyh mre vxusoxv1 H{shulhqfh udwlqj lv d zd| wr frxqwhudfw wklv w|sh ri
lqhflhqf|/ lqghshqghqwo| ri wkh xqhpsor|phqw ehqhw qdqflqj sureohp/ ehfdxvh/ lq wkh suhv0
hqfh ri d plqlpxp zdjh/ lw lv zruwk lqwurgxflqj ulqj frvwv wkdw duh uhglvwulexwhg wr hpsor|huv
dv d vxevlg| orzhulqj oderu frvw1 Vhfrqg/ wkh vfdo h{whuqdolw| vwuhvvhg e| Ihogvwhlq +4<:9, vwloo
h{lvwv zkhq wkhuh lv d plqlpxp zdjh/ vlqfh wkh oderu frvw dprxqwv wr z . lq wkh devhqfh ri
h{shulhqfh udwlqj/ ehlqj wdnhq dv jlyhq e| hdfk hpsor|hu1
Lq rughu wr looxvwudwh wkh frqvhtxhqfh ri h{shulhqfh udwlqj lq wkh suhvhqfh ri d plqlpxp
zdjh/ ohw xv lqwurgxfh d elqglqj plqlpxp zdjh lq wkh ehqfkpdun h{leoh hfrqrp|1 Dv vkrzq
Ai @ih@}i i Tihi?Ui h@|?} ?_i ? |i Mi?U4@h! iUL?L4) t ti| |L ' fS2 At @*i t U@*U*@|i_
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.
49
0.1205
0.12
Unemployment
0.1195
0.119
0.1185
0.118
0.1175
0.117
0.1165
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
Experience Rating Index
1
1.05
1.1
Iljxuh 7= H{shulhqfh udwlqj zlwk d h{leoh zdjh dqg vwulqjhqw mre surwhfwlrq1
0.0926
0.0924
Unemployment
0.0922
0.092
0.0918
0.0916
0.0914
0.0912
0.6
0.7
0.8
0.9
1
1.1
Experience Rating Index
1.2
1.3
1.4
Iljxuh 8= H{shulhqfh udwlqj lq wkh oderu pdunhw zlwk d plqlpxp zdjh dqg qr ulqj frvw1
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1
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57
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58
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+4<,
IZA Discussion Papers
No.
Author(s)
Title
Area
566
R. Hujer
M. Caliendo
D. Radić
Skill Biased Technological and Organizational
Change: Estimating a Mixed Simultaneous
Equation Model Using the IAB Establishment
Panel
5
09/02
567
H. Lehmann
K. Phillips
J. Wadsworth
The Incidence and Cost of Job Loss in a
Transition Economy: Displaced Workers in
Estonia, 1989-1999
4
09/02
568
H. O. Duleep
D. J. Dowhan
Revisiting the Family Investment Model with
Longitudinal Data: The Earnings Growth of
Immigrant and U.S.-Born Women
1
09/02
569
J. Haltiwanger
M. Vodopivec
Worker Flows, Job Flows and Firm Wage
Policies: An Analysis of Slovenia
4
09/02
570
T. K. Bauer
S. Bender
Technological Change, Organizational
Change, and Job Turnover
1
09/02
571
O. Ashenfelter
M. Greenstone
Using Mandated Speed Limits to Measure the
Value of a Statistical Life
5
09/02
572
C. Y. Co
I. N. Gang
M.-S. Yun
Self-Employment and Wage Earning:
Hungary During Transition
4
09/02
573
R. T. Riphahn
O. Serfling
Item Non-Response on Income and Wealth
Questions
6
09/02
574
R. Kuhn
S. Stillman
Understanding Interhousehold Transfers in a
Transition Economy: Evidence from Russia
4
09/02
575
H. Antecol
D. A. Cobb-Clark
S. J. Trejo
Human Capital and Earnings of Female
Immigrants to Australia, Canada, and the
United States
5
09/02
576
M. Fertig
C. M. Schmidt
H. Schneider
Active Labor Market Policy in Germany –
Is There a Successful Policy Strategy?
6
09/02
577
K. Ariga
G. Brunello
Are the More Educated Receiving More
Training? Evidence from Thailand
2
09/02
578
I. N. Gang
F. L. Rivera-Batiz
M.-S. Yun
Economic Strain, Ethnic Concentration and
Attitudes Towards Foreigners in the European
Union
1
09/02
579
I. N. Gang
M.-S. Yun
Decomposing Inequality Change in East
Germany During Transition
4
09/02
580
I. N. Gang
J. Landon-Lane
M.-S. Yun
Gender Differences in German Upward Income
Mobility
1
09/02
581
P. Cahuc
F. Malherbet
Unemployment Compensation Finance and
Labor Market Rigidity
5
09/02
An updated list of IZA Discussion Papers is available on the center‘s homepage www.iza.org.
Date