Tuesday, September 16, 2008

Rest unemployment

Following up on yesterday's post on how little time unemployed people spend searching for a job, I claim that we need to model unemployment differently. We need to realize that there are some people who activily search, and others that consider an unemployment spell to be a vacation (or a temporary layoff).

This is the premise that Fernando Alvarez and Robert Shimer have in their latest paper. They extend the Lucas-Prescott island model to factor in work, search unemployment, rest unemployement and inactivity. The idea is that you search when you look for work in a different sector, while you rest when you just wait in your sector for things to improve. What this model points out is that rest unemployment is actually efficient: why waste resources searching when sectoral conditions will improve shortly?

One consequence of this is that unemployment insurance has an important role here: it allows unemployed workers to wait for the jobs to reopen and avoids forcing them to search. A somewhat similar argument has been made earlier by Daron Acemoglu and Robert Shimer, showing that unemployment insurance allows to wait and find better matches. But in this case, everybody searches all the time.

2 comments:

Kansan said...

Interesting to see arguments on how unemployment insurance is beneficial coming out of Chicago...

hoopster56 said...

You guys need to get out more and work more normal jobs. If you know anyone who works construction, this is exactly the pattern. In addition, they typically work for cash (unreported) when unemployed from official jobs and often do quite well.

A couple of other data points. Many years ago before I was married I had a roommate who got laid off and carefully used all his unemployment benefits before looking for a job. He viewed as a paid holiday, which with extended benefits lasted almost a year. He managed to spend winter in Mexico, and got a job within 2 days of benefits ending.

Later, when I was married and had one small child I was laid off. As an engineer, I was paid pretty well, and my wife was a nurse. When I was laid off, i took over all child care, and stopped the house cleaning service. That along with the reduction in commuting cost, meant that in net cash, we were almost as well off as with both of us working. In addition, we had an old house and there was a lot of work to do on it. So, I was quite content to stay home and work on the house. I basically stumbled on a job with about 3 weeks, but I would have been quite happy to stay unemployed much longer.