Reservation Wages and Unemployment Insurance

34 Pages Posted: 15 May 2006

See all articles by Robert Shimer

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

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

Shimer, Robert J. and Werning, Ivan, Reservation Wages and Unemployment Insurance (April 28, 2006). MIT Department of Economics Working Paper No. 06-16, Available at SSRN: https://ssrn.com/abstract=902066 or http://dx.doi.org/10.2139/ssrn.902066

Robert J. Shimer (Contact Author)

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Ivan Werning

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HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

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