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Working Paper, No. 1999-10, 1999
Labor Market Policies in an Equilibrium Search Model
We explore to what extent differences in employment and unemployment across economies can be generated by di¤erences in labor market policies. We use a version of the Lucas-Prescott equilibrium search model with undirected search and endogenous labor-force participation. Minimum wages, degree of unionization, …ring taxes, and unemployment benefits are introduced and their effects analyzed. When the model is calibrated to US observations it reproduces several of the elasticities of employment and unemployment with respect to changes in policies reported in the empirical literature. We …nd that: i) minimum wages have small e¤ects; ii) …ring taxes have similar e¤ects to those found in frictionless general equilibrium models; iii) unions have large and negative effects on employment, unemployment, and welfare; and iv) unemployment bene…ts substantially increase unemployment and reduce welfare.


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