Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/39555 
Year of Publication: 
2000
Series/Report no.: 
ZEI Working Paper No. B 09-2000
Publisher: 
Rheinische Friedrich-Wilhelms-Universität Bonn, Zentrum für Europäische Integrationsforschung (ZEI), Bonn
Abstract: 
We argue that labor market institutions are endogenous. Our analysis focuses on the government's decision to set unemployment benefits in response to an unemployment shock in a simple, reduced-form model of the labor market. It is found that the largest increases in benefits should occur in economies where the adverse incentive effects of benefits are largest. Adjustment costs of changing benefits can introduce hysteresis in benefit setting and unemployment. Both (very) bad and good temporary shocks (including monetary) can permanently reduce unemployment benefits and the unemployment rate. A desirable feature of the model is that the mechanism yielding hysteresis (which requires a concave utility function) ceases to operate when unemployment tends to one.
Subjects: 
Optimal unemployment benefits
hysteresis
natural rate of unemployment
JEL: 
J6
Document Type: 
Working Paper

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