DUAL-LABOR MARKET AND UNEMPLOYMENT COMPENSATION

Abstract

This paper discusses the impact of unemployment compensation on the employment and wages of
regular and non-regular labor in a dual-labor market. The model in this paper assumes an effective
demand constraint and an imperfectly competitive market. The results obtained are as follows.
An increase in unemployment compensation increases the wages of regular labor to maintain its
productivity. However, this temporarily decreases the employment of regular labor, so that the
productivity and wages of non-regular labor decrease. The result is an increase in the relative wage rate
of regular labor and the relative amount of non-regular labor employed. This result is independent of
any economic regime. In terms of the impact on employment volume, the existence of two regimes,
one wage-driven and one profit-driven, is confirmed. However, the effect on employment is weaker if
unemployment compensation is financed by taxing profits.