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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

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
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.

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