Unemployment Insurance and Reservation Wages
AbstractThe present paper examines the reservation wages reported by a largesample of unemployed individuals in the United States in May 1976. The majorityof unemployedindividuals report reservation wages that are at least as highas the wage they were paid on their last job. Approximately one-fourth of alljob seekers required a wage that is at least 10 percent higher than the wage ontheir previous job.Our econometric evidence shows that the level of unemployment benefitsrelative to previous wages has a powerful effect on the individual's reservation wage. A ten percent increase in the U.I. replacement ratio increases the reservation wage by about percent for job losers who are not on layoff and bysomewhat less for other unemployed groups. Separate regressions to analyze the high reservation wage per se show that a ten percent increase in the U.I. replacement ratio also increases by about four percentage points the probability that an unemployed individual will require a wage increase of 10 percent or more.These estimates imply that reducing net unemployment insurance benefits (by lowering gross benefits or by taxing unemployment benefits) could significantly lower the average duration of unemployment and the relative number of long duration spells of unemployment. Because of the non-linear response of the unemployment duration to the reservation wage, reducing a high unemployment insurance ratio by ten percentage points is likely to have a greater impact on unemployment than reducing a low unemployment insurance ratio by ten percentage points.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1011.
Date of creation: Nov 1984
Date of revision:
Publication status: published as Felstein, Martin and James Poterba. "Unemployment Insurance and Reservation Wages." Journal of Public Economics, Vol. 23, (1984), pp. 141-167.
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin Neil Bailey, 1977. "Unemployment insurance as insurance for workers," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 495-504, July.
- John M. Barron & Wesley Mellow, 1981. "Changes in Labor Force Status among the Unemployed," Journal of Human Resources, University of Wisconsin Press, vol. 16(3), pages 427-441.
- James L. Medoff & Katharine G. Abraham, 1980.
"Experience, Performance, and Earnings,"
NBER Working Papers
0278, National Bureau of Economic Research, Inc.
- Warner, John T & Poindexter, J Carl, Jr & Fearn, Robert M, 1980. "Employer-Employee Interaction and the Duration of Unemployment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(2), pages 211-33, March.
- Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 10(3), pages 379-402, December.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.