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On the Provision of Insurance Against Search-Induced Wage Fluctuations
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On the Provision of Insurance Against Search-Induced Wage Fluctuations

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  • Jean-Baptiste Michau

    (Ecole Polytechnique, France)

Abstract

This paper investigates the provision of insurance to workers against search-induced wage fluctuations. I rely on numerical simulations of a model of on-the-job search and precautionary savings. The model is calibrated to low skilled workers in the U.S.. The extent of insurance is determined by the degree of progressivity of a non-linear transfer schedule. The fundamental trade-off is that a more generous provision of insurance reduces incentives to search for better paying jobs, which is detrimental to the production efficiency of the economy. I show that progressivity raises the search intensity of unemployed worker, which reduces the equilibrium rate of unemployment, but lowers the search intensity of employed job seekers, which results in a lower output level. I also solve numerically for the optimal non-linear transfer schedule. The optimal policy is to provide almost no insurance up to a monthly income level of $1450, such as to preserve incentives to move up the wage ladder, and full insurance above $1650. This policy halves the standard deviation of labor incomes, increases output by 2.4% and generates a consumption-equivalent welfare gain of 1.3%. Forbidding private savings does not fundamentally change the shape of the optimal transfer function, but tilts the optimal policy towards more insurance at the expense of production efficiency.

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  • Jean-Baptiste Michau, 2014. "On the Provision of Insurance Against Search-Induced Wage Fluctuations," 2014 Meeting Papers 112, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:112
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    1. On the Provision of Insurance Against Search-Induced Wage Fluctuations
      by Christian Zimmermann in NEP-DGE blog on 2014-08-29 05:02:16

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    1. Jesper Bagger & Mads Hejlesen & Kazuhiko Sumiya & Rune Vejlin, 2018. "Income Taxation and the Equilibrium Allocation of Labor," Economics Working Papers 2018-06, Department of Economics and Business Economics, Aarhus University.
    2. Michau, Jean-Baptiste, 2015. "Optimal labor market policy with search frictions and risk-averse workers," Labour Economics, Elsevier, vol. 35(C), pages 93-107.

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