Deposit-Refundon Labor: A Solution to Equilibrium Unemployment?

Author: Mr. Ben J. Heijdra and Ms. Jenny E Ligthart

Volume/Issue: Volume 2000 Issue 009

Publication date: January 2000

ISBN: 9781451842586

$15.00

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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Labor , Economics- Macroeconomics , WP , labor market , deposit-refund schemes , firing costs , hiring subsidies , job search , unemployment , A , firm behavior , firm-worker pairing , co-state variable , restructuring firm , rents physical capital , Labor markets , Employment , Wages

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Summary

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.