DP2902 How Does Imperfect Competition in the Labour Market Affect Unemployment Policies?

Author(s): Xavier Wauthy, Yves Zenou
Publication Date: August 2001
Keyword(s): education, heterogeneous workers and firms, Nash Equilibrium in Wages, unemployment policies
JEL(s): H20, J31, L13
Programme Areas: Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2902

We consider a continuum of workers ranked according to their ability to acquire education, and two firms with different technologies that compete imperfectly in wages to attract these workers. Once employed, each worker bears an education cost proportional to their initial ability, this cost being higher in the high-technology firm. At the Nash equilibrium, we show that unemployed workers are those with the lowest initial abilities. We then study different policies that subsidy either the education cost or wages and compare them. We found that the first best allocation can only be implemented by selective policies. We then analyse second best non-selective policies that do not discriminate between workers and firms and show that, in terms of welfare, subsidizing education costs or wages is strictly equivalent.