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Running Out of Time: Limited Unemployment Benefits and Reservation Wages

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  • S. Nuray Akin

    (University of Miami)

  • Brennan Platt

    (Brigham Young University)

Abstract

We study unemployment insurance (UI) in an equilibrium environment in which unemployed workers only receive benefits for a finite length of time. Although all workers have identical productivity and leisure value, the random arrival of job offers creates ex-post differences with respect to their time remaining until benefit expiration. Firms, which are also homogeneous, can exploit these differences, leading to an endogenous wage distribution. This allows us to examine the equilibrium effect of policy changes in both the size and length of UI benefits. Surprisingly, an increase in benefits can actually cause wages to fall, which is contrary to the predictions of on-the-job-search models. Moreover, we explain well-documented patterns of how the hazard rate of exiting unemployment responds to these policy changes. Our theory also explains why this hazard rate jumps at the time of benefit exhaustion. (Copyright: Elsevier)

Suggested Citation

  • S. Nuray Akin & Brennan Platt, 2012. "Running Out of Time: Limited Unemployment Benefits and Reservation Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 149-170, April.
  • Handle: RePEc:red:issued:10-201 DOI: 10.1016/j.red.2011.06.001
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    Citations

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    Cited by:

    1. Jorge Andrés Tamayo & Jairo Núñez & Carlos Medina, 2013. "The Unemployment Subsidy Program in Colombia: An Assessment," IDB Publications (Working Papers) 4622, Inter-American Development Bank.
    2. Dominic Coey & Bradley Larsen & Brennan Platt, 2016. "A Theory of Bidding Dynamics and Deadlines in Online Retail," NBER Working Papers 22038, National Bureau of Economic Research, Inc.
    3. S. Akin & Val Lambson & Grant McQueen & Brennan Platt & Barrett Slade & Justin Wood, 2013. "Rushing to Overpay: Modeling and Measuring the REIT Premium," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 506-537, October.
    4. Masters, Adrian, 2014. "Statistical discrimination from composition effects in the market for low-skilled workers," Labour Economics, Elsevier, vol. 26(C), pages 72-80.
    5. Ş. Akın & Brennan Platt, 2014. "A theory of search with deadlines and uncertain recall," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 101-133.
    6. S. Nuray Akin & Brennan C. Platt, 2011. "Searching on a Deadline," Working Papers 2011-11, University of Miami, Department of Economics.
    7. Akin Serife Nuray, 2012. "Immigration, Fiscal Policy, and Welfare in an Aging Population," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-45.
    8. Etienne Lalé, 2014. "Front-loading the Payment of Unemployment Benefits," Bristol Economics Discussion Papers 15/651, Department of Economics, University of Bristol, UK, revised 16 Nov 2015.
    9. Brennan Platt & Nuray Akin, 2017. "An Equilibrium Search Model of Fire Sales," 2017 Meeting Papers 949, Society for Economic Dynamics.
    10. Ş. Akın & Brennan Platt, 2014. "A theory of search with deadlines and uncertain recall," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 101-133.
    11. Brennan Platt & Nuray Akin, 2012. "A theory of search with recall and uncertain deadlines," 2012 Meeting Papers 777, Society for Economic Dynamics.

    More about this item

    Keywords

    Unemployment benefits; Potential benefit duration; Wage dispersion; Equilibrium search; Hazard rates;

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

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