The Effects Of Unemployment Benefits On Wage Determination PDF Download

The paper analyses the effects of unemployment benefits in the United States private non-farm sector during the period 1948 to 1982. It is first shown that microeconomics studies yield only part of the total effect of unemployment benefit changes and that existing time series analyses are unsatisfactory because they neglect dynamic disequilibrium behavior. A labor demand and supply model which specifically allows for dynamic diequilibrium behavior is set up. Real wage rates do not adjust speedily enough to clear the labor market within a year; to allow for this, real wage adjustments are modelled using a Bowden partial adjustment process. In diequilibrium, employ is determined using the short side of the market assumption. The estimation procedure is full information maximum likelihood. Changes in real employment benefits have significant and substantial effects on real wages, employment and unemployment. A moderate increase in real unemployment benefits causes a marked rise in the equilibrium real wage rate, a marked fall in the non-farm sector's equilibrium employment level, and marked increase in the unemployment rate. In response to the increase in benefits employment follows a time path that overshoots the new equilibrium level; the unemployment rate will overshoot also or else the equilibrium unemployed effect is greater than the employment effect. The paper's conclusion is that unemployment benefits are an important influence in the U.S. labor market and are an important cause of U.S. unemployment.