Abstract: This paper presents a simple model of wage bargaining and employment
flows designed to address the effects of policies to increase the rate
of exit to employment of the long-term unemployed. Exit rates from
long- and short-term unemployment have two effects on the unemployment
rate: a positive one as high exit rates strengthen current employees'
bargaining positions and thus wages and a negative one as faster
outflows from unemployment reduce the stock of unemployed. Thus,
there is a trade-off between the exit rate from long-term unemployment
and the exit rate from short-term unemployment. The paper's principal
result is that, in steady-state, increasing the exit rate from
long-term unemployment reduces the unemployment rate. Dynamic
simulations show that raising the exit rate of the long-term
unemployed leads to a decrease in both the mean and variance of the
unemployment rate.
Keywords: Unemployment, duration dependence
Full paper (542 KB PDF)
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