Unemployment Insurance Payments as a Search Subsidy: A Theoretical Analysis

This paper examines the consequences of a change in unemployment insurance payments. Most previous works on this topic have utilized a job search model to predict that an increase in unemployment insurance payments will lead to an increase in the expected duration of unemployment. It is shown in the paper that this conclusion rests on two assumptions of dubious validity. When these assumptions are replaced by more reasonable ones significantly different predictions are obtained. For example, an increase in unemployment insurance payments is predicted to reduce the number of long term unemployed.