UNEMPLOYMENT AND PUBLIC POLICY WITH MULTIPLE LABOR MARKET INTERMEDIARIES

PAUL JOSEPH SPEAKER, Purdue University

Abstract

Several authors over the past decade have attempted to evaluate the impact of public policy programs which are aimed at reducing the level of unemployment. Although there are slight differences in the description of the behavior of economic agents in these studies and in the specific policy schemes, they have been in general agreement about the effects on unemployment from public policy changes. In particular, an increase in unemployment insurance payments or a decrease in the cost of search leads to an increase in the level of unemployment. These studies have tended to neglect the specific mechanisms that are employed in the job search process. That is, job seekers generally are assumed to conduct a process of random seach of wage offers rather than the adoption of the services of particular labor market intermediaries to find suitable job positions. We observe that unemployed workers do use informal methods of search as well as the services of both private and public employment agencies. Since each of these intermediaries are used by job seekers and each may involve different costs, then it seems to be inadequate to discard the role of these intermediaries in labor market models. We evaluate the impact of multiple labor market intermediaries in two situations. First, we present an economy where individual submarkets of labor are characterized by a constant wage environment. We describe the general equilibrium in this economy and investigate the impact of public policy changes on the search behavior of the unemployed. Next, using BLS survey data we present an empirical interpretation of the results of the model. The second situation represents a variable wage environment where the supply side behavior of the labor market is determined. The results of these models indicate that the supply side reactions in the labor market to changes in UI payments are qualitatively the same in either a constant wage or a variable wage environment. Although the reasons for these changes differ, the effects indicate that individuals who receive UI payments may decrease their search effort by employing fewer labor market intermediaries while non-recipients intensify their job search. The reactions to changes in the costs of search through the various intermediaries depends in large part on the availability of search alternatives to the unemployed workers. When there is a choice of intermediaries in all periods then an increase in the fee for one intermediary sees more job seekers adjusting their job search to the alternative methods. However, when this choice is limited to a finite number of periods then the reaction in a variable wage environment is to intensify search by lowering reservation wages.

Degree

Ph.D.

Subject Area

Economics

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