THE RELATION BETWEEN UNEMPLOYMENT BENEFITS, THE RESERVATION WAGE AND SEARCH DURATION*
| Author | Cees Gorter,Dirk Gorter |
| DOI | http://doi.org/10.1111/j.1468-0084.1993.mp55002004.x |
| Date | 01 May 1993 |
| Published date | 01 May 1993 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 55,2(1993)
0305-9049 $3.00
THE RELATION BETWEEN UNEMPLOYMENT
BENEFITS, THE RESERVATION WAGE AND
SEARCH DURATLON*
Dirk Gorter and Cees Gorter
I. INTRODUCTION
Labour force dynamics is very much of public and scientific interest. Despite
considerable employment growth in the past few years, excess labour supply
is still very high historically. Insight has grown that not always the same
persons are looking for a job, but that there are substantial flows both into,
out of, and within the labour market. An important contribution to the
analysis of these flows is given by job search theory. According to this theory
persons who want to improve on their labour market position, look for a job.
Searching implies costs, in particular because it takes time, but this time is not
considered wasted since in the end it leads to a more efficient allocation of
labour.
Search theory implies that for a searcher the probability of finding a job is
determined by two factors. The first of these is the probability of getting a job
offer by an employer; the second is the probability that the searcher accepts
the job offer. Personal characteristics of the searcher as well as labour
market conditions determine the job offer probability. The probability that
the searcher accepts an offer depends on the wage level of the offer (the job is
supposed to be completely characterized by the wage). The offer will be
accepted if this wage exceeds the reservation wage chosen by the searcher.
Since search theory implies that the outflow probability from job search to
employment is determined by individual characteristics, this theory is very
useful as a basis for an empirical analysis of outflow probabilities and search
durations. Another advantage is the close connection with the economic
behaviour of the searcher. Of course, to be able to conduct such a study, there
has to exist a data set which contains all relevant variables. The Dutch Socio-
economic Panel (SEP), conducted by NCBS since 1984, complies. Not only
have individual labour market histories been recorded, but in two waves
reservation wages have been asked as well.
* Research for this paper has been carried out by the first author at the Netherlands Central
Bureau of Statistics (NCBS), his former employer. The views expressed here are not necessarily
those of the NCBS, however.
199
200 BULLETIN
This report takes search theory as a start. Relations between charac-
teristics of individuals, the reservation wages they choose, the environment in
which they live and the search durations are analysed. An important assump-
tion, necessary for deriving these relations, is the stationarity of the labour
market; this assumption is quite strong, but it makes a structural analysis
possible. Central is the question how unemployment benefits and the chosen
reservation wages influence search durations. For example it is interesting to
know whether a reduction of benefits leads to a shortening of search periods
and thereby to a lower level of unemployment.
The literature on structural search models is rather recent, probably
because of the lack of useful data. Important contributions have been made
by Kiefer and Neumann (1979) in the United States and Narendranathan et
al. (1985) and Lancaster and Chesher (1983) in the United Kingdom. In the
Netherlands structural models have been estimated by Ridder and Gorter
(1986) and Van den Berg (1990). In some of these studies reservation wages
are not measured directly but are modelled relying on search theory.
An extensive literature does exist on job search durations. In these studies
the outflow probability itself is modelled, not the underlying components.
Typical questions concern the determinants of search duration and whether
there exists duration dependence. Early examples are Lancaster (1979) and
Nickell (1979). Some Dutch studies in this area are Gorter et al. (1992),
Kooreman and Ridder (1983), Theeuwes et al. (1990) and Van Opstal and
Theeuwes (1986). Prior to the present study, Gorter and Hoogteijling (1990)
conducted a duration analysis using SEP-data.
The report is divided as follows. In Section II a short overview of
stationary search theory is presented, and it is shown how relevant para-
meters can be determined. In the next section the available data is considered;
special attention is given to the quality of these data. Section IV contains the
results of the empirical analysis. Finally, some concluding remarks are made
in Section V.
II. JOB SEARCH THEORY
In the exposition of job search theory we at first follow Mortensen (1986). It
is assumed that searchers are risk neutral and have no financial constraints;
furthermore, we assume that accepted jobs are left by searchers with a fixed,
exogenous rate y. In addition we assume that job offers arrive according to a
Poisson process with parameter 1u; this implies that on the average u h offers
arrive in each period of length h. A job is characterized by the wage w, which
should be considered as a random draw from the wage distribution F; this
distribution is fixed and known to the searcher. Let p be the interest rate, b
the income during a period of search (for example an unemployment benefit)
and c the search costs in that period, both per unit. The optimal strategy for
the searcher is to accept an offer above a certain wage (the so-called reserva-
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