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Reservation Wages and Unemployment Insurance

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  • Robert Shimer
  • Iván Werning

Abstract

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 benefits in the United States but highlight the need for more research on the determinants of reservation wages. Our approach complements those based on Baily's [Journal of Public Economics, X (1978), 379-402] test. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 122 (2007)
Issue (Month): 3 (08)
Pages: 1145-1185

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Handle: RePEc:tpr:qjecon:v:122:y:2007:i:3:p:1145-1185

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  1. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February.
  2. Kenneth Burdett & Dale T. Mortensen, 1977. "Labor Supply Under Uncertainty," Discussion Papers 297, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Martin Feldstein, 2005. "Rethinking Social Insurance," American Economic Review, American Economic Association, vol. 95(1), pages 1-24, March.
  4. repec:spo:wpecon:info:hdl:2441/9704 is not listed on IDEAS
  5. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  6. Jones, Stephen R G, 1988. "The Relationship between Unemployment Spells and Reservation Wages as a Test of Search Theory," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 741-65, November.
  7. Robert Shimer & Ivan Werning, 2005. "Liquidity and Insurance for the Unemployed," NBER Working Papers 11689, National Bureau of Economic Research, Inc.
  8. Harry J. Holzer, 1987. "Job search by employed and unemployed youth," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 40(4), pages 601-611, July.
  9. Devine, Theresa J. & Kiefer, Nicolas M., 1991. "Empirical Labor Economics: The Search Approach," OUP Catalogue, Oxford University Press, number 9780195059366, September.
  10. Stefano DellaVigna & M. Daniele Paserman, 2005. "Job Search and Impatience," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 527-588, July.
  11. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
  12. Katz, Lawrence F. & Meyer, Bruce D., 1990. "The impact of the potential duration of unemployment benefits on the duration of unemployment," Journal of Public Economics, Elsevier, vol. 41(1), pages 45-72, February.
  13. Bruce D. Meyer, 1995. "Lessons from the U.S. Unemployment Insurance Experiments," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 91-131, March.
  14. Hans Bloemen & Elena Stancanelli, 2001. "Individual Wealth, Reservation Wages, and Transitions into Employment," Sciences Po publications info:hdl:2441/9704, Sciences Po.
  15. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Adriana Kugler & Robert M. Sauer, 2004. "Doctors Without Borders? Re-licensing Requirements and Negative Selection in the Market for Physicians," Working Papers 133, Barcelona Graduate School of Economics.
  17. Lawrence F. Katz, 1986. "Layoffs, Recall and the Duration of Unemployment," NBER Working Papers 1825, National Bureau of Economic Research, Inc.
  18. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  19. Fishe, Raymond P H, 1982. "Unemployment Insurance and the Reservation Wage of the Unemployed," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 12-17, February.
  20. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February.
  21. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  22. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392 Elsevier.
  23. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  24. Sant, Donald T, 1977. "Reservation Wage Rules and Learning Behavior," The Review of Economics and Statistics, MIT Press, vol. 59(1), pages 43-49, February.
  25. Pissarides, Christopher A, 1982. "Job Search and the Duration of Layoff Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 595-612, November.
  26. Ehrenberg, Ronald G & Oaxaca, Ronald L, 1976. "Unemployment Insurance, Duration of Unemployment, and Subsequent Wage Gain," American Economic Review, American Economic Association, vol. 66(5), pages 754-66, December.
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