GENERAL EQUILIBRIUM EFFECTS OF UNEMPLOYMENT COMPENSATION WITH LABOR-FORCE PARTICIPATION

This article examines the effects of unemployment compensation when th e size of the labor force depends on unemployment benefits. The analys is is based on an aggregate model with search and matching in which un employment compensation affects the wage determination process and the number of jobs and workers. As with partial equilibrium models, unemp loyment compensation raises the unemployment rate and the ratio of une mployed to vacancies. However, wages may go up or down and firms may b e better off. Generally, employed workers are worse off. Unemployment compensation transfers income from employed factors to unemployed fact ors, leading to greater input levels.