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.
