Social Preferences and Labor Market Policy

We find that the main featues of labor policy across OECD countries can be explained by a simple general equilibrium search model with risk neutral agents and a government that chooses policy to maximize a social welfare function. In equilibrum, policies are chosen to optimal redistribute income from advantaged to disadvantaged workers. A worker can be disadvantaged in the sense that they may have less ability to aquire and utilize skills in the workplace. The model explains why passive benefits tend to fall and active benefits tend to increase during the course of unemployment spell. The model also explains why countries that appear to pursue equity spend more on both active and passive labor market programs.

Introduction: This paper studies the impact of di§erent social preferences on the optimalcharacteristics of labor market policy. It develops a competitive search equi-librium model with a government that pursues a combined goal of maximizing effciency and equity. Firms make irreversable investments in vacancies.Workers are paid wages and choose to invest in skills. In this environment,the optimal labor policy addresses two social concerns. The Örst social con-cern is that some workers have less ability to use and acquire the required skills needed by employers.

Author: Trine Filges, John Kennes, Birthe Larsen, Torben Tranæs

Source: Copenhagen Business School

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