The Impact of Unemployment Benefits in an Economy with Search Frictions and Unemployment-Induced Productivity Loss

Details

Supervisors

Oikonomou, Rigas

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité approfondie

Abstract

This paper examines the impact of unemployment benefits on an economy characterized by search frictions in the labor market and unemployment-induced productivity loss on ex ante homogeneous workers facing idiosyncratic unemployment risks by building an extension on Krusell et al. (2010). The analysis is framed as a continuous-time dynamic programming problem, with the solution implemented using the finite-difference method outlined in Achdou et al. (2022). The results indicate that increasing unemployment benefits consistently improves welfare compared to the baseline scenario with a 1% payroll tax. However, this welfare improvement is accompanied by a significant rise in the variances of individual asset holdings and consumption levels. Furthermore, the analysis reveals that in the extension incorporating unemployment-induced productivity loss, firm's profits and filled job values are higher compared to the original Krusell et al. (2010) framework.