TITLE:
Labor Market Policies in Matching Models: Do Externalities Matter?
AUTHORS:
Riccardo Tilli
KEYWORDS:
Matching Models, Labor Market Policies, Search Externalities
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.4,
April
12,
2019
ABSTRACT: This paper analyzes the role played by five labor
policy instruments (firing tax, hiring subsidies, taxation, unemployment
benefits and tax structure) in a matching model with endogenous job
destruction, when search externalities are not internalized and the market
solution is inefficient. Since the theoretical model does not show univocal
effects on equilibrium unemployment of some policy tools (such as hiring
subsidies and firing tax), we propose a calibration and a numerical simulation
of the model, in order to verify their real impact on unemployment and labor
market structure. Results show that if, as is reasonable to assume, there are frictions
on the labor market that generate search externalities, a labor market
regulation becomes desirable and can be aimed at the internalization of
externalities through an appropriate combination of labor policy instruments.
In particular, our results have highlighted the crucial role of hiring
subsidies and progressive taxation, not only for the achievement of the optimal
solution, but also for supporting some forms of passive labor policies, mainly
unemployment benefits and employment protection.