Gkionakis, Vasileios
(2007)
Labour market policy and individual saving behaviour in markets with search frictions.
PhD thesis, London School of Economics and Political Science.
Abstract
The present dissertation evaluates specific labour market policies and investigates individual saving behaviour in economies characterized by search and matching frictions in the labour market. The first chapter investigates the optimality of state provided unemployment insurance in a search theoretic framework with saving and borrowing constraints. The model is solved numerically, since an analytic solution is not possible, and then calibrated using features of the US economy. The results demonstrate that when individuals have access to saving, the importance of unemployment benefits provision diminishes significantly. Ex post heterogeneity among agents, matters however. Individuals that were unlucky not to accumulate enough assets to buffer the unemployment risk, would still prefer to receive non-trivial amounts of state provided benefits during their unemployment spell. The second chapter of the thesis is concerned with the interaction between saving, consumption and search. It starts by documenting that the excess sensitivity of consumption growth to lagged labor income growth conceals a negative sensitivity of consumption growth to lagged unemployment growth. To understand this empirical regularity, we embed search frictions in a heterogeneous agent, precautionary savings model and study the implications for unemployment and consumption dynamics both at the microeconomic and macroeconomic level. The third and final chapter employs a standard search and matching model with no saving, in order to study the effects of firing taxes on the job destruction rate, when probation period - or temporary contract - policies are implemented. It is shown that, contrary to conventional wisdom, firing taxes can amplify the job turnover rate by providing incentives to destroy surviving matches at the end of the probation period. Moreover, low skill workers are shown to be more severely affected while wage inequality across different productivity groups may increase.
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