Reservation Wages and Unemployment Insurance
34 Pages Posted: 15 May 2006
There are 2 versions of this paper
Reservation Wages and Unemployment Insurance
Reservation Wages and Unemployment Insurance
Date Written: April 28, 2006
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 insurance but highlight the need for more research on the determinants of reservation wages. Our approach is intuitive and complements those based on Baily's (1978) test. Some advantages of our test are that it uses less of the structure of the model, it is entirely behavioral and does not require separate risk-aversion estimates, and it is robust to various extensions including worker heterogeneity.
Keywords: unemployment insurance, social insurance, reservation wages, search
JEL Classification: J6
Suggested Citation: Suggested Citation
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