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Unemployment Insurance Payments as a Search Subsidy



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FILE COpy JC2 J EMQVE I I 400 n NSTTUTE FOR RESEARCH ON DO ERTY DISCUSSION 1 IV PAPERS 1 UNEMPLOYMENT INSURANCE PAYMENTS AS A SEARCH SUBSIDY A THEORETICAL ANALYSIS Kenneth Burdett I I I 1 Unemployment Insurance Payments as a Search Subsidy A Theoretical Analysis I Kenneth Burdett March 1977 I would like to acknowledge the assistance of Dale Mortensen and Charles Wilson Of course all errors contained in the study are mine The research reported here was supported in part by funds granted to the Institute for Research on Poverty by the Department of Health Education and Welfare pursuant to the Economic Opportunity Act of 1964 ABSTRACT In recent years much interest has been shown in studying the effects of unemployment insurance UI payments on the labor supply decisions of workers In most previous work job search models have been used to analyze individual labor supply reactions to changes in UIpayments when demand factors are held constant Using such models it has been shown that an increase in UI payments makes unemployed workers more selective when evaluating job offers which in turn leads to an increase in the expected duration of completed spells of unemployment The purpose of the study is to extend the theoretical analysis of this topic It is shown that the result obtained from the job search models rest on two assumptions that cannot be justified empirically Further if these assumptions are replaced by more reasonable ones a new and significantly different theory results This theory leads to a much richer set of pre dictions than previously presented Introduction In recent years interest has been shown in studying the relationship between unemployment insurance UI payments and the level of un employment in an economy the effects of ur Most interest has centered on determining payments on the individual labor supply decision l Job search models have been used to analyze the individual labor supply reactions to changes in ur payments men de and factors are held



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