Reservation wages & unemployment insurance
By: Robert Shimer [and] Ivǹ Werning
Contributors: Werning, Ivǹ; Massachusetts Institute of Technology. Dept. of Economics
Edition: Rev.
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 06-16, Revised; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 06-16.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2006
Place of publication: Cambridge, MA
Language: eng
Number of pages: 32
Other titles: Reservation wages and unemployment insurance
Description: 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 Classifications: J6.
Notes: "February 16, 2006. -- Revised: April 28, 2006."

Includes bibliographical references (p. 31-32).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.