Public Finance Effects in an Equilibrium Search Model with Differences in Company Productiv.pdf

DEPARTMENT OF MANAGEMENT AFDELING FOR VIRKSOMHEDSLEDELSE Working Paper 1999 -12 Public Finance Effects in an Equilibrium Search Model with Differences in Company Productivi- ty Levels: An Application to Danish Data Bent Jesper Christensen, Peter Jensen, Michael Svarer Niel- sen, Kim Poulsen and Michael Rosholm UNIVERSITY OF AARHUS CC DENMARK ISSN 1398-6228 Public Finance Effects in an Equilibrium Search Model with Differences in Company Productivity Levels: An Application to Danish Data Bent Jesper Christensen, Peter Jensen, Michael Svarer Nielsen, Kim Poulsen and Michael Rosholm We estimate an equilibrium search model with productivity dispersion between markets and structural unemployment, using Danish data. For women, structural unemployment is relatively more important than frictional unemployment, but for men, frictional unemployment is most important. Overall, frictional unemployment is relatively more important than in an earlier study on Dutch data. We determine a policy that has public finance advantages. 1. INTRODUCTION The introduction of the firm’s profit maximization problem in search models leads to the type of equilibrium model necessary for the study of public finance. Equilibrium search models have received increasing attention recently among labour economists, mainly due to their ability to simultaneously explain equilibrium wage dispersion and labour market flows. They were introduced by Burdett Mortensen (1998). In competitive models wage policy does not matter because by definition in equilibrium the law of one price holds: all workers of a given type receive the same wage. On the other hand, search models generate monopsony