Unemployment Benefits and Job Quality: Unveiling the Complexities of Labour Market Dynamics

TL;DR

This paper develops a macroeconomic model to analyze how unemployment benefits influence job quality, stability, and social network effects, revealing that longer benefits may hinder job matching and social contacts in the labour market.

Contribution

It introduces a novel macroeconomic model incorporating social networks and heterogeneity to study unemployment benefits' effects on labour market outcomes.

Findings

Longer unemployment benefits do not necessarily improve job-matching quality.

Social networks are crucial mediators in labour market dynamics.

Extended benefits may reduce the effectiveness of social contacts in job finding.

Abstract

This study explores the impact of unemployment benefits on employment quality, job stability, and tenure within complex labour market dynamics. Given the macroeconomic consequences of changes in unemployment benefits, including their impact on employment rates and output growth, we develop a closed macroeconomic model that integrates heterogeneous households and adaptive firms and incorporates real-world entry-exit market mechanisms. The model considers personal values, social norms, and social network formation among workers as we examine the role of social contacts in mediating the effects of unemployment benefits on job-matching quality and labour market outcomes. We simulate the model across various scenarios where unemployment benefit schemes differ in level and/or duration. Our results suggest that extending the duration of unemployment benefits does not necessarily improve job-matching quality. Longer benefits may indeed reduce the effectiveness of social networks in job finding, indicating that social contacts play a key role in labour market dynamics.