Reservation Wages and Unemployment Insurance

Robert Shimer and Iván Werning

No 12618, NBER Working Papers from National Bureau of Economic Research, Inc

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 (1978) test.

JEL-codes: J6 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-dge, nep-ias and nep-lab
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Citations: View citations in EconPapers (16)

Published as Robert Shimer & Iván Werning, 2007. "Reservation Wages and Unemployment Insurance," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1145-1185, 08.

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