Unemployment Insurance, Duration of Unemployment, and Subsequent Wage Gain

[Excerpt] In order to evaluate what the optimal level of UI benefits is, one must therefore first estimate the magnitude of the relationships between UI benefits levels and unemployed workers\u27 durations of unemployment and post-unemployment wages. There have been several previous studies of the impact of UI benefits on duration of spells of unemployment, however none have been completely satisfactory methodologically. To our knowledge, there have been no previous studies of the system\u27s impact on subsequent wage rates. We attempt to fill these gaps, utilizing data from the National Longitudinal Survey (NLS) to estimate both relationships. The plan of our paper is as follows. First, we sketch the implications of theories of job search for our estimating equations. Next, we briefly discuss the NLS data. The following four sections summarize the empirical results we have obtained for four cohorts of data: older males, ages 45-59; women, ages 30-44; and younger males and females, ages 14-24. Finally, we consider the implications of our results for public policy. Due to space limitations our discussion here is necessarily brief and details of our research are found elsewhere

Direct tests of the reservation wage property

The theory of optimal job search focuses on reservation wages. Thus, comparative dynamic properties such as effects of changes in search subsidies (e.g. unemployment insurance benefits), etc. are usually stated in terms of changes in the reservation wage path. The principal difference between infinite and finite search horizon models is that the reservation wage is constant in the former and decreasing in the latter. Also, a central concern in models of search from an unknown distribution is identifying conditions under which reservation wages exist.'^ There have been no previous direct tests ofthe reservation wages predicted by finite horizon search models.^ One reason is that reservation wages are not observed in field labour markets.^ In addition, previous experimental tests of search theory have used observations of search duration, search income, and accepted wages, not reservation wages. The results of such tests generally do not imply rejection of (the implications of) the risk neutral search model. Some previous experimental tests of job search theory are reported i