TY  - JOUR
AU  - Blanchard,Olivier
AU  - Tirole,Jean
TI  - The Optimal Design of Unemployment Insurance and Employment Protection. A First Pass
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10443
PY  - 2004
Y2  - April 2004
UR  - http://www.nber.org/papers/w10443
L1  - http://www.nber.org/papers/w10443.pdf
N1  - Author contact info:
Olivier J. Blanchard
International Monetary Fund
Economic Counsellor and Director
Research Department
700 19th Street, NW
Rm. 10-700
Washington DC, 20431
Tel: 202-623-7825
Fax: 202-623-7271
E-Mail: blanchar@mit.edu

Jean Tirole
Institut d'Economie Industrielle
Bureau MF529 - Bat. F
21 allees de Brienne
31000 Toulouse
FRANCE
Tel: 33-561-128642
E-Mail: jean.tirole@tse-fr.eu
AB  - Much of the policy discussion of labor market institutions has been at the margin, with proposals to tighten unemployment benefits, reduce employment protection, and so on. There has been little discussion however of what the ultimate goal and architecture should be. The paper focuses on characterizing this ultimate goal, the optimal architecture of labor market institutions. We start our analysis with a simple benchmark, with risk averse workers, risk neutral firms and random shocks to productivity. In this benchmark, we show that optimality requires both unemployment insurance and employment protection---in the form of layoff taxes; it also requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and heterogeneity of firms or workers. We show how the architecture must be modified in each case. The scope for insurance may be more limited than in the benchmark; so may the scope for employment protection. The general principle remains however, namely the need to look at unemployment insurance and employment protection together, rather than in isolation.
ER  -