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Reservation Wages and Unemployment Insurance

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  • Robert Shimer
  • Ivan 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 (1978) test.

Suggested Citation

  • Robert Shimer & Ivan Werning, 2006. "Reservation Wages and Unemployment Insurance," NBER Working Papers 12618, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12618
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    References listed on IDEAS

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    1. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-782, July.
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    9. 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 118-142, February.
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    More about this item

    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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