NCPA - National Center for Policy Analysis

Unemployment Insurance Delays Job Search

February 11, 2004

In May 2003, in an attempt to soften the effects of the recession, unemployment benefits were extended for about 2.4 million jobless Americans whose regular and supplemental benefits had run out. Those who had exhausted their state aid were eligible for an additional 13 weeks of emergency unemployment benefits.

However, a new study by two economists from the University of South Carolina suggest that, while well-intentioned, providing such assistance to the unemployed actually makes the problem worse. The authors contend that unemployment insurance raises an individual's reservation wage -- that is, the minimum amount of money for which one is willing to work -- and softens the necessity to avoid financial hardship, thus lengthening the duration of unemployment.

Using regression analysis, the study determined that:

  • Recipients of unemployment insurance were 37.8 percent less successful at finding a job as compared to nonrecipients.
  • Overall, for each week away from the expiration of unemployment benefits, recipients were 3.3 percent less likely to find employment than nonrecipients.
  • Conversely, when benefits expire, these recipients were two and half times more likely to find a job.

Other key findings were that a worker's age and tenure with their old company are associated with lower rates of success in finding employment, reflecting a slower flow of job offers and elevated reservation wage, respectively.

Source: John T. Addison and Pedro Portugal, "How Does the Unemployment Insurance System Shape the Time Profile of Jobless Duration?" Discussion Paper No. 978, Institute for the Study of Labor, January 2004.

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=491562#PaperDownload

 

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