The effects of productivity and benefits on unemployment: Breaking the link
Alessio J. G. Brown, Britta Kohlbrecher, Christian Merkl & Dennis J. Snower
#2016-032
In the standard macroeconomic search and matching model of the labour
market, there is a tight link between the effects of (i) productivity on
unemployment and (ii) unemployment benefits on unemployment. This tight
link is at odds with the empirical literature. We present a two-sided
model of labour market search where the household and firm decisions are
decomposed into job offers, job acceptances, firing, and quits. In such
a model, unemploy-ment benefits affect households’ behaviour directly,
without having to run via the bargained wage. In line with the evidence,
productivity shocks may have quantitatively large effects on
unemployment, while benefits only have moderate effects. Our analysis
shows the importance of investigating the effects of policies on the
households’ work incentives and the firms’ employment incentives within
the search process.
Keywords: Unemployment benefits, search and matching, aggregate shocks,
macro models of the labour market
JEL Classification: E24, E32, J63, J64