This paper argues that a risk-averse worker’s after-tax reservation wage encodes all the relevant information about her welfare. This insight leads to a novel test for the optimality of unemployment insurance based on the responsiveness of reservation wages to unemployment benefits. Some existing estimates imply significant gains to raising the current level of unemployment insurance but highlight the need for more research on the determinants of reservation wages. Our approach is intuitive and complements those based on Baily’s (1978) test. Some advantages of our test are that it uses less of the structure of the model, it is entirely behavioral and does not require separate risk-aversion estimates, and it is robust to various extensions including worker heterogeneity. Shimer’s research is supported by a grant from the National Science Foundation. Werning is grateful for the hospitality of the Federal Reserve Bank of Minneapolis and Harvard University. We are grateful to The goal of this paper is to develop a test for the optimal level of unemployment insurance

This paper presents an empirical analysis of unemployment patterns in the OECD countries from the 1960s to the 1990s. Our results indicate the following. First, broad movements in unemployment across the OECD can be explained by shifts in labour market institutions. Second, interactions between average values of these institutions and shocks make no significant additional contribution to our understanding of OECD unemployment changes.

A hallmark of modern labor economics is the close interplay between the development of theory, data sources and econometric testing. The evolution of the economic analysis of unemployment insurance provides a good illustration. New theoretical approaches, in particular job-search theory, have inspired a large amount of empirical research, some of it methodologically innovative and most of it highly relevant for economic policy. The paper presents a broad survey and an assessment of the economic analysis of unemployment insurance as it has evolved since the 1970s. JEL-classification: H21, J65, D8. Keywords: Unemployment insurance, unemployment, job search, wage determination. * The paper was prepared for the Scandinavian Journal of Economics 100th anniversary symposium on Public Policy and Economic Theory, Lysebo, Oslo, January 31 - February 2, 1997. I have received useful comments from Anders Bjrklund, Per-Anders Edin, Peter Fredriksson, Nils Gottfries, Ann-Sofie Kolm, Alan Manning, J...

provided useful comments. We especially thank Jaap Abbring, Joshua Angrist, Christopher Taber, and Bruce Meyer for their suggestions, along with three anonymous referees. Is the Threat of Reemployment Services More Effective than the Services Themselves? Evidence from Random Assignment in the UI System This paper examines the effect of the Worker Profiling and Reemployment Services (WPRS) system. This program “profiles ” UI claimants to determine their probability of benefit

This paper provides a review of the recent literature on how incentives in unemployment insurance (UI) can be improved. We are particularly concerned with three instruments, viz. the duration of benefit payments (or more generally the time sequencing of benefits), monitoring in conjunction with sanctions, and workfare. Our reading of the theoretical literature is that the case for imposing a penalty on less active job search is fairly solid. A growing number of empirical studies, including randomized experiments, are in line with this conclusion.

One of the best-known empirical results in public finance and labor economics is the “spike” in the exit rate from unemployment around the expiration of jobless benefits (see e.g., Robert Moffitt, 1985; Lawrence Katz and Bruce Meyer, 1990a; Katz and Meyer, 1990b). This sharp surge in the hazard rate is widely interpreted as evidence that recipients are waiting until their benefits run out to return to work. The spike in exit rates has become a leading example of the distortionary effects of unemployment insurance (UI) and social insurance programs more generally (see e.g., Martin Feldstein, 2005). In this paper, we present the results of a meta-analysis of the literature on unemployment exit rates around benefit exhaustion, as well as new evidence using administrative data for a large sample of Austrian job losers. Our main finding is that the way in which unemployment spells are measured has a large effect on the magnitude of the spike at exhaustion, both in existing studies and in our Austrian data. Spikes are generally smaller when the spells are measured by the time to next job than when they are defined by the time spent on the unemployment system. In the Austrian data, we find a large spike in the exit rate from registered unemployment at the point of benefit exhaustion, consistent with earlier studies (e.g., Rafael Lalive et. al., 2007). However, the hazard of re-employment rises only slightly at the same point. Even recalls to the previous employer –which account for one-fifth of spell terminations in our data –increase by no more than 20 % at benefit exhaustion. We conclude that most job seekers in Austria are not waiting to return to work until their UI benefits are exhausted. Rather, a large fraction simply leave the unemployment registry once their benefits end and they are no longer required to register to maintain their eligibility for benefits. This finding underscores the importance of distinguishing between the e¤ects of government programs such as UI on the decision to work vs. their auxiliary effects on the classification of non-working time. The effect of UI on whether individuals choose to be

This paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs, and by encouraging firms to create those jobs. We use a quantitative model to investigate whether this effect is comparable in magnitude to the standard moral hazard effects of unemployment insurance. Our model economy captures the behavior of the U.S. labor market for high school graduates quite well. When unemployment insurance becomes more generous starting from the current U.S. levels, there is an increase in unemployment similar in magnitude to the micro-estimates, but because the composition of jobs also changes, total output and welfare increase as well. ∗This paper is prepared for the International Seminar on Macroeconomics 1999. Thanks to seminar

Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 2200

Workers who are more impatient search less intensively and set lower reservation wages. The effect of impatience on exit rates from unemployment is therefore unclear. If agents have exponential time preferences, the reservation wage effect dominates for sufficiently patient individuals, so increases in impatience lead to higher exit rates. The opposite is true for agents with hyperbolic time preferences. Using two large longitudinal data sets, we find that impatience measures are negatively correlated with search effort and the unemployment exit rate and are orthogonal to reservation wages. Impatience substantially affects outcomes in the direction predicted by the hyperbolic model. I.

Abstract: This paper assesses the cost and benefits of extensions in the duration of unemployment insurance (UI) benefits in recessions. Using multiple sharp eligibility thresholds by age in the German UI system we obtain regression discontinuity estimates for the effect of extensions in the duration of UI benefits. Using the universe of unemployment spells and career histories we implement this strategy for twenty years and across industries and correlate with measures of the business cycle. We find large extensions in UI durations have modest effects on non-employment durations that are similar across demographic groups, but have no effects on measures of job quality, or longer-term job and employment outcomes. While the non-employment effects of UI extensions we find are at best declining somewhat in large recessions, the effect on benefit duration (a measure of the UI exhaustion rate) is strongly countercyclical. Our findings imply that large expansions in UI duration during recessions are unlikely to lead to sizable increases in unemployment duration or the unemployment rate, to contribute to unemployment persistence, or to lead to worsening job outcomes for the long-term unemployed. Moreover, we show that in a model of job search with liquidity constraints, increases in the welfare benefits of UI extensions in recession, as indicated by the UI exhaustion rate, are likely to outweigh the welfare costs in terms of higher non-employment and program durations.