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IMF Staff Papers Logo last updated: January 2002
Volume 48, Number 3
Deposit-Refund on Labor:
A Solution to Equilibrium Unemployment?

Ben J. Heijdra and Jenny E. Ligthart

Full Text of this Article (PDF 107K)

Abstract: The paper studies the employment effects of a deposit-refund scheme on labor in a simple search-theoretic model of the labor market. It is shown that if a firm pays a deposit when it fires a worker, to be refunded when it employs the same or another worker, the vacancy rate increases and the unemployment rate declines. The scheme introduces rigidities in the labor market, however, which may be undesirable in countries wanting to liberalize their labor markets. [JEL J3, J68]

2001 International Monetary Fund