DO UNEMPLOYMENT BENEFITS AFFECT ON‐THE‐JOB SEARCH? EVIDENCE FROM LABOR TURNOVER BEFORE ESTABLISHMENT CLOSURES

Abstract

We develop a job search model that predicts that potential job losers would reduce on‐the‐job search (OTJS) effort and job‐to‐job transitions before layoffs, in response to an increase in the potential duration of unemployment benefits (UB). To test this prediction, we exploit changes in the maximum potential duration of benefits in Germany to analyze how it affected labor turnover before establishment closings. The evidence supports the model prediction that workers with longer potential benefit duration are more likely to remain with their establishments until closure and to enter nonemployment. These findings indicate that the effects of UB on the OTJS decisions of potential job losers should be considered in the optimal design of the parameters of unemployment insurance systems. (JEL J63, J64, J65)