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30 Indus. & Lab. Rel. Rev. 505 (1976-1977)
Unemployment Insurance and Job Search Decisions

handle is hein.journals/ialrr30 and id is 507 raw text is: UNEMPLOYMENT INSURANCE AND JOB SEARCH DECISIONS DALE T. MORTENSEN T HE purpose of this paper is twofold: to develop a more realistic model of job search than that currently available and to interpret recent empirical results on the side effects of unemployment insurance (UI) within the framework developed. The model embodies the following features: the worker is allowed to search while em- ployed; the intensity of search is a choice variable; and the cost of search is viewed as the value of leisure forgone. Two insti- tutional features of the UI program in most states are also explicitly recognized: benefits are paid only for a specified dura- tion rather than in every period of an un- employment spell, and workers who quit are not qualified for benefits. In a market with imperfect wage infor- mation the job possibilities of an individ- ual worker can be characterized as a dis- tribution of possible wage offers. If this distribution is known and if a worker searches by sampling from this distribution in a sequential manner, then the optimal strategy is to accept the first offer obtained greater than some reservation wage. The reservation wage that maximizes the ex- pected present value of the future earning stream is such that the cost of search equals the expected gain in future income attrib- utable to search. The expected duration of Dale T. Mortensen is Professor of Economics at Northwestern University. He would like to thank Kenneth Burdett for his helpful assistance; the model developed herein is a utility-maximizing extension of that analyzed by Burdett in his article, Employee Search and Quits, The American Eco- nomic Review, forthcoming.-EDITOR search is the inverse of the probability per period of finding an acceptable wage offer. In all existing wage search models, unem- ployment compensation is viewed as a pay- ment made contingent on being unem- ployed, with the possibility of a future separation typically ignored. Because this payment reduces the income forgone by searching while currently unemployed but does not affect future income, the expected search duration increases with the benefit rate.1 Job turnover is the rule rather than the exception in every labor market. In those industries that experience significant fluc- tuations in demand, the typical worker, whether currently employed or not, expects with positive probability that he or she will be laid off at some future date. This expec- tation implies that the search behavior of those not currently eligible for benefits (new entrants, exhaustees, and quits) is nevertheless influenced by the parameters of the UI scheme, because they will be eli- gible during any future employer-initiated unemployment spell. Consequently, an im- provement in either the benefit rate or the maximum benefit period makes current em- ployment relatively more attractive. In re- sponse, a worker who currently does not qualify for benefits (an unqualified work- er) finds employment more quickly by both lowering his or her reservation wage 'See Dale T. Mortensen, Job Search, the Dura- tion of Unemployment, and the Phillips Curve, The American Econorrtic Review, Vol. 60, No. 5 (December 1970), pp. 847-62 for example. Industrial and Labor Relations Review, Vol. 30, No. 4 (July 1977). @ 1977 by Cornell University. 505

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