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Reservation Wages and Unemployment Insurance

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  • Robert Shimer
  • Iván Werning

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 benefits in the United States but highlight the need for more research on the determinants of reservation wages. Our approach complements those based on Baily's [Journal of Public Economics, X (1978), 379–402] test.

Suggested Citation

  • Robert Shimer & Iván Werning, 2007. "Reservation Wages and Unemployment Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1145-1185.
    • Handle: RePEc:oup:qjecon:v:122:y:2007:i:3:p:1145-1185.
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    File URL: http://hdl.handle.net/10.1162/qjec.122.3.1145
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    1. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392, Elsevier.
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    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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