Deposit-refund on labor: A solution to equilibrium unemployment?

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 of 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.