Working Paper: NBER ID: w12618
Authors: Robert Shimer; Ivan Werning
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.
Keywords: No keywords provided
JEL Codes: J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unemployment Benefits (J65) | Aftertax Reservation Wage (J31) |
| Pretax Reservation Wage (J39) | Aftertax Reservation Wage (J31) |
| Unemployment Benefits (J65) | Pretax Reservation Wage (J39) |
| Raising Benefits (H55) | Welfare (I38) |