| Public finances are a critical mechanism because government expenditure and fiscal policies affect private resource allocation and long-run welfare. Public economists have devoted considerable efforts to measuring the welfare effects of different fiscal policies and of alternative ways of financing government spending. In this article, we focus on the welfare effects of government policies specifically related to unemployment. To improve the efficiency of the labor market, the government can assist firms to hire workers, encourage people to search for a job (to participate in the labor market), or directly increase matching efficacy between job seekers and recruiters. The government can reduce the costs of posting vacancies and recruiting workers to help firms to hire workers. The government can encourage people to search for a job or to participate in the labor market by increasing the wages they earn when employed, such as raising the minimum wage, or provide unemployment compensation even when job seekers do not obtain a job opportunity. To increase matching efficacy, the government can supply publicly funded education or job training programs. Examples of government spending on matching efficacy include the employment service offices provided by various governments.1 Note that minimum wage legislation is not a policy directly aimed at unemployment, instead being a policy that many governments around the world use to address what they consider to be unfairly low wages, resulting from an unequal socioeconomic situation between employees and employers.2 In addition, the purpose of unemployment compensation is to prevent the unemployed from experiencing excessive hardship. Unemployment compensation, rather than encouraging participation in the labor market as intended, usually has an adverse effect, tending to encourage the unemployed to remain unemployed rather than seek employment. However, both policies do influence unemployment and the operation of the labor market. Thus, in this article, we investigate the effects of four policies related to unemployment, namely, the minimum wage, unemployment compensation, subsidies for hiring costs, and public spending on matching efficacy. As we analyze unemployment and related macroeconomic variables, the setting of a competitive labor market is not suitable for our investigation. Moreover, evidence indicates that the labor market is frictional in the real world. According to Diamond (1982), Mortensen (1982), and Pissarides (1984), informational and institutional barriers exist in job searching, recruiting, and vacancy creation in the labor market. As the above four fiscal policies affect agents’ behavior in the labor market, it is appropriate to analyze the impact of such legislation in a frictional labor market. |