Effect of Unemployment Insurance on Duration of Unemployment: A Study Based on CWBH Data for Florida

Abstract

Previous studies of unemployment insurance have obtained estimates for reduced form model consisting of two equations: the duration equation and the post unemployment earnings equation. These equations do not, however, allow us to estimate the effects of unemployment insurance accurately. The observed wage distribution is a truncated distribution-it is the wage offer distribution truncated by reservation wages. As such, unless the truncation bias is taken into account, there are misleading results. Also, the duration equation is derived from more basic behavioral relationships. To study the effects of unemployment insurance on the duration of unemployment, one needs to go into the basic underlying behavioral equations. In this report, the authors assume that the behavioral equations are: the wage offer equation and the reservation wage equation. An individual is assumed to accept employment if the wage offer is greater than or equal to the reservation wage. Past unemployment, of course, has an impact on both wage offers and reservations wages. A stochastic threshold regression model is used to estimate the parameters of the wage offer equation and the reservation wage equation.