IZA DP No. 6992: Do Low-Wage Workers React Less to Longer Unemployment Benefits? Quasi-Experimental Evidence
published in: Oxford Bulletin of Economics and Statistics, 2014, 76(2), 185–207
The fact that unemployed workers have different abilities to smooth consumption entails heterogeneous responses to extended unemployment benefits. Our empirical exercise explores a quasi-experimental setting generated by an increase in the benefits entitlement period. The results point towards a hump-shape response of unemployment duration over the one-year pre-unemployment wage distribution; individuals at the bottom and at the top of the wage distribution reacted less than those in the interquartile range. This behavior of job searchers is consistent with labor supply models with unemployment insurance and savings. It questions the optimality of very long entitlement periods to target the unemployment experiences of low-wage workers.