Alternative Policies for Unemployment Insurance

Abstract

The effects of a wage subsidy program on the duration of insured unemployment are investigated using data from a demonstration project conducted by the Illinois Department of Employment Security. UI claimants were offered a voucher that could be presented to potential employers as an inducement for their hire. Participation in the subsidy program was voluntary and eligibility was limited to a ten week period following the initial UI claim. In principle, the subsidy should increase the demand for the unemployed worker's services by reducing an employer's net wage costs. It may also have supply effects if the expiration of eligibility for the subsidy causes an increase in search effort, though it is also possible that the subsidy causes workers to adjust their reservation wage levels upward. In practice, subsidies have stigmatic effects that tend to lower participation rates by high-skilled workers. As a result, participants in a subsidy program have longer average durations of unemployment than non-participants. However, correcting for self-selection, we find that wage subsidies can substantially increase a worker's probability of reemployment and that the net benefits of such a program exceed its cost. In addition, wage subsidies are compared to a search bonus proposal which is also cost effective, but, due to differences in participation patterns, has rather different effects.