Unemployment Subsidy and Labour Supply

1. Unemployment Subsidy and Labour Supply Pedro Cosme da Costa Vieira Faculdade de Economia do Porto Portugal pcosme@fep.up.pt

2. Introduction • In a market economy, unemployment is an important phenomenon because • It is almost certain that every worker will become unemployed • Wages are the workers’ most important source of income • Workers anticipate the impact of being unemployment imperfectly

3. Introduction • The abrupt reduction of income causes: • Social tensions • Children difficulties at school • Criminality increase • Economic tensions • Reduction in consumption • Impossible to pay financial obligations

4. Introduction • The unemployment subsidy intends to minors those economic and social tensions • The subsidy design is difficult because • It must be high to minors those tensions • But unemployment may becomes an attractive “occupation”

5. Introduction • In my work I present an intertemporal optimisation model • Dynamic programming after Bellman, 1957 • A theoretical study of the impact of a balanced unemployment subsidy on • The labour supply function (part. equilibrium) • The intensity of search for a new job • Difficulties of experimentation

6. The dynamic model • Each time period worker maximises an utility function, • increasing with consumption • decreasing with labour supply

7. The dynamic model • Worker has in mind the future • If employed, he has a wage • There is a budget constrain • The future utility is discount to the present

8. The dynamic model • If the worker is unemployed • He has the unemployment subsidy • He does not work

9. The dynamic model • The employment situation is coded in the parameter E

10. The dynamic model • Being PLJ(St) the probability the worker losses his job

11. The dynamic model • Being PFJ(St) the probability of an unemployed worker finds a new job

12. The dynamic model

13. The dynamic model • The variables and parameters are • Et - unemployed/employed • rt - wealth • W - Hourly wage • Sub - unemployment subsidy • T - contribution to the unemployment fund

14. Formalisation

15. Calibration / simulation • Values turn the model stable • Parameter values • j = 1/3, KL=10, KF = 1, KS = 10, b = 10% • Exogenous variables • W = 2.5, Sub = 0.25, T = 10% • Long term endogenous variables • r1 = 3.2

16. Results • Labour Supply Function (Sub = 0)

17. Results • Search Intensity for a New Job (Sub = 0)

18. Results • Probability of Finding a new Job with Time

19. Results • Short-term Labour Supply (Sub = 0.25)

20. Results • Long-term Labour Supply (Sub = 0.25)

21. Conclusion • Using a theoretical optimisation model, results compatible with stylised facts: • Short-term Labour .S.F. is more elastic • Short-term search for a new job is low • The unemployment subsidy causes • Short-term Labour .S.F. even more elastic • Discourage the search for a new job