Labor market reforms and optimal unemployment insurance : Policy experiment on the Swedish labor market

Abstract: This paper examines how a reduction in EPL affects the utility of older workers, by changing the probability of re-employment as well as the risk of becoming unemployed. I generalize the Bailey-Chetty framework and make a one-period model that shows maximizing search behavior of the agent. With data from previous studies, and Swedish authorities, the model is calibrated. The results show predominant negative welfare effects. When the re-employment probability increases more than the risk of becoming unemployed decreases, one will need to increase the compensation less compared to when the risk of becoming unemployed increases more than the re-employment probability. The result also exclusively shows that the current social security fund is too generous and had to be reduced to reach an optimal level. On the other hand, the social security fund is more optimal when the probability of re-employment increases more than the risk of becoming unemployed. Furthermore, the results show that younger workers have a worse welfare from the unemployment insurance fund compared to older workers.