Do Unemployment Benefits Affect Workers’ Job Search? Evidence from Establishment Closures in West Germany∗ Job Market Paper

The effect of unemployment benefits (UB) on the behavior of unemployed individuals has been extensively studied in the literature. In contrast, we still know little about how UB affect the behavior of employed workers. This paper aims at filling this gap, using job-to-job (JTJ) transitions as the main outcome of analysis. The theoretical framework developed in the paper indicates that UB should only affect the behavior of workers who are at risk of job loss. Therefore, I focus the analysis on workers at establishments that subsequently closed down. The data come from administrative records for West Germany. I exploit changes in the rules for the duration of unemployment benefits in the 1980s and 1990s to test the prediction from the model that workers with longer benefits would be less likely to take a new job before their establishments close down. This can be explained because workers entitled to longer benefits have incentives to exert less effort in searching for a new job and also have higher reservation wages. I find that the empirical evidence strongly supports this prediction. In other words, I find that workers entitled to longer benefits are more likely to remain with the establishments until their closure.