Modern Economy, 2011, 2, 800-803
doi:10.4236/me.2011.25088 Published Online November 2011 (http://www.SciRP.org/journal/me)
Unemployment Benefits and Unemployment
William Beranek, David R. Kamerschen*
Department of Economics, Terry College of Business, The University of Georgia,
Athens, Georgia
Received May 4, 2011; revised June 28, 2011; acc epted July 23, 2011
Abstract
This paper seeks to provide a simpler explanation of the Match Quality Hypothesis (MQH). For the less
mathematically inclined, it avoids formal analysis and yet derives the relevant implications, i.e., if unem-
ployed workers currently collecting unemployment benefits are given more benefits, both the average period
of unemployment duration increases as well as the level of unemployment. To produce these effects, only
one person behaving in this manner is required. We cite recent evidence supporting these implications. Ex-
amined are implications of this theorem for both U.S. and European regions where, in some cases, voluntar-
ily unemployed workers are eligible for unemployment benefits. We question the importance of the notion
that generous unemployment benefits that intensify searches for better jobs, and hence prolonged job
searches, ultimately yield societ al ben efits .
Keywords: Unemployment, Unemployment Benefits, Match Quality Hypothesis
1. Introduction
Much formal analysis has focused intensively on the
response of benefit-collecting unemployed workers to an
increase in benefits. Mortensen [1] suggests that 1) the
opportunity costs of leisure time, even though workers
may be unemployed, 2) the intensity of the job search
and, 3) reservation wage prices play key roles in ex-
plaining duration of unemployment, and the level of
steady-state unemployment. His model finds that the
effect on unemployment duration of a benefit extension
is ambiguous. However, numerous other writers, includ-
ing Card and Levine [2], and Lavile, van Ours, and Ze-
wimuller [3], consistent with earlier studies, predict a
positive response in duration of unemployment and a
higher steady state level of unemployment. In a related
effort, Carling, Edin, Hackman, and Holmilund [4] hy-
pothesize that the probability of the worker obtaining
employment increases as the expiration of unemploy-
ment benefits expires. They find evidence to support this
view. Our literature review is deliberately incomplete
citing, for the most part, only those references that are
immediately relevant to the MQH.
There is need, however, for a simpler, less formal, yet
rigorous approach to explaining how a more generous
benefit translates into a longer period of unemployment
duration, and higher unemployment among those col-
lecting benefits. In this effort, we also compare the ef-
fects of U.S. procedures of distributing benefits with the
more liberal European style. In addition, we show that as
few as one benefit collector responding to this stimulus
of a benefit increase is sufficient to produce these con-
sequences.
In sum, when faced with a jump in benefits, some
unemployed people will tend to become more selective
in the choice of a new job, a motive that focuses on en-
hancing the quality of the job. Whether the unemployed
actually become choosier is, of course, an empirical
question.
Increasing benefits can serve an important humanitar-
ian aim among needy groups. However, there are those
among the unemployed for whom such benefits can pro-
vide reduced incentives towards seeking immediate em-
ployment. Among these recipients, some may resp ond by
not seeking employment at all. As shown above, investi-
gators have sought to determine whether the number of
those who become more selective is significant.
2. The Hypothesis
An increase in benefits to members of the unemployment
group will tend to induce them to narrow their list of job
targets. The reason for this assertion is that, after ranking
possible job opportunities in order of preferences, and

801 W. BERANEK ET AL.
because of the additional unemployment benefits, the
seeker will forego exploring inferior op enings in favor of
relatively more attractive ones. He can, and does, be-
come more selective (Acemoglu and Shimer [5],
Jovanovic [6], and Centeno [7]). These reduced options
become his new set of opportunities, and in this sense,
reduces incentives to search for jobs. In turn, the reduced
set of job options implies a longer period of job search
and a lengthening of the average period of unemploy-
ment. Because of lengthening unemployment spans, it
also implies, all other things given, a tendency for the
number unemployed to rise. In addition, an increase in
benefits can intensify job-seeking efforts along with
greater job selectivity.
3. The Explanation
A special case is sufficient to illustrate the notion. Sup-
pose all unemployed persons receiving benefits obtain
jobs in 30 days following th e start of their benefits. With
an extension of benefits, suppose they take an extra 30
days, or a total of 60 days. Assume also that the flow of
new entrants into the unemployment pool remains con-
stant. If so, counting from the day the exten sion is effec-
tive, for the next 30 days there will be no decreases in the
unemployment rolls since people that were formerly
leaving the rolls in 30 days now depart in 60 days. This
means for the next 30 days the unemployment pool will
rise to a higher level, reaching a new steady state. And
this higher level will prevail as long as the rate of new
entrants into the pool is equal to the rate at which they
depart. The assumption of an add itional 30 days of work
search applies to new entrants as well. Even though this
represents an extreme situation, it vivid ly illustrates what
can happen.
Continue to assume that the rate of inflow into the
unemployment pool remains constant. Suppose, as sug-
gested by some writers (Lavile, Van Ours, and Z-
weimuller [3], that in response to the benefit increase
some currently employed workers voluntarily join the
ranks of benefit receivers, thus increasing the rate of new
entrants to the pool. U.S. laws and institutions do not
permit this response. To varying degrees, it is permissi-
ble in some European countries. In this case, should this
result in an instantaneous response, the unemployment
pool will increase more rapidly at first, reaching a new
magnitude above the previous steady-state level, at
which time it is assumed that the rate of inflow again
becomes equal to the rate of outflow. The unemployment
bulge is now due to two factors: Benefit recipients be-
coming more selective; and the voluntary response of
currently employed workers to become benefit receivers.
These results illustrate the dang ers in attempting to draw
inferences from mere changes in unemployment data.
Figure 1 provides a sketch of this process. The solid
line from day 30 to day 60 captures the effect of the
change in the number of unemployment compensation
beneficiaries (NUCB) induced by an extension of the
benefit period, the quality-job seeking effect. In the
European culture, however, the solid line denotes the
effects of the MQH on some European workers. (The
same solid line denotes the hypothetical responses of
both U.S. and European workers.) If, however, some
currently employed European people leave their jobs to
collect benefits, this produces the dashed line from day
30 to day 60, and beyond. In this case, previously em-
ployed workers join the unemployment pool at day 31.
For European workers, from day 31 and beyond, the
dashed line is the sum of two effects: 1) the addition to
the pool of benefit collectors induced to leave gainful
work voluntarily in order to collect benefits but who also
take 60 days to gain new employment. 2) The addition
due to some members of the recipient pool extending
their work search by 30 days, the MQH effect. If the
European response among currently employed workers is
repeated every 60 days, then the numbers of new benefit
collectors always equal the numbers leaving the pool, i.e.,
those obtaining new jobs, and a so-called steady state is
attained.
The response in unemployment due to workers be-
having in this manner is remarkab ly sensitive. Let us rule
out forward-looking workers who leave employment in
response to an increase in benefits, as well as those who
increase their enthusiasm for job-search. Regardless of
country, it is remarkable that only one person among the
unemployed with the MQH trait is required to increase
the average duration of unemployment and the level of
unemployment. There is, as it were, a bottleneck created
by the temporary reduction to zero of the rate of outflow
of workers from the pool of benefit recipients. However,
as long as new entrants into the pool behave in accor-
dance with the MQH, and the inflow rate is equal to the
rate of outflow, this bu lge in the levels o f benefit collec-
Figure 1. The behavior of NUCB.

W. BERANEK ET AL.
802
tors can be sustai ne d i ndefinit el y1.
Of course, if benefits are slashed, and if behavioral re-
lations remain as assumed, the process is reversed. The
average period of unemployment declines, inducing a
reduction in the steady-state unemployment total.
4. Further Implications
The question is when benefits are initially granted, does
not a response similar to the one outlined above take
place? Yes, the same process unfolds and, all other
things given, the average period of unemployment in-
creases followed by an expansion in unemployment.
Implied by our analysis is the important fact that an
increase in total unemployment does not signify an in-
crease in the rate at which workers are being laid-off.
This myth is common, especially among news commen-
tators. In the same vein, an expansion of unemployment
rolls does not imply decreases in the rate employers are
hiring new workers. Such an easy-to-make misinterpre-
tation appears to be widespread among journalists.
5. Empirical Studies
A rich literature exists on the effect of benefits on the
duration of unemployment. See, for ex ample, Moffitt and
Mickelson [8], Moffitt [9], and Katz and Meyer [10] for
studies of U.S. data, and Nickell and Layard [11] and
Machin and Manning [12] for examinations of European
data. The two most recent U.S. studies are Card and Le-
vine [2] who found that, using New Jersey data, exten-
sion of benefits by 13 weeks leads to an increase of 7%
in the number of recipients exhausting their regular (i.e.,
pre- extension benefits) and a 1 week increase in the av-
erage period of unemployment. Katz and Meyer [10],
using a different sample, reported an increase in the du-
ration of unempl oy ment of 2 to 2.5 weeks.
Finally, employing Austrian data, Lavile, van Ours
and Zweimuller [3] found that benefit increases lead to
significant increases in the steady-state unemployment
rate. They found that the most important facto r lead ing to
this increase is not the increased duration of unemploy-
ment among the existing jobless, but to the increase in
incentives for currently employed workers to leave their
jobs and receive benefits. The reader is cautioned not to
put too much credence on the comparative values of
these U.S. and European estimates. The differences in
institutions, labor laws, union policies, and employer
policies across states and countries are so vast, making
magnitude inferences hazardous.
6. A Related Hypothesis
People who take advantage of added benefits and obtain
better jobs, it is suggested, may be more efficiently em-
ployed and hence of greater value to society (Centeno
[7]). Unanswered are the questions of how to measure
efficiencies and their magnitude. However, such benefits
are potentially available anyway because job seekers
have viable alternatives. Particularly, the seeker may
accept a less satisfactory job while continuing the search
for an improved position. Many people do just that.
Consequently, society obtains these hypothesized added
efficiencies in the normal functioning of the labor market
without requiring a boost in unemployment compensa-
tion. In a related vein, university professors, even though
gainfully employed, are notoriously open to exploring
other opportunities, and their professional meetings pro-
vide, among other things, a perfect setting for such ac-
tivities. Nevertheless, Centeno [7], using the length of a
re-employed worker's subsequent job tenure as a proxy
for job quality, finds evidence to support this belief. This
proxy, however, is fraught with hazards since there are
so many important variables that influence length of
subsequent employment.
7. Conclusions
As noted by many writers, increases in unemployment
benefits can provide reduced incentives for the jobless to
seek jobs. The job seeker may increase his overall qual-
ity standards in demanding a new job, the Match-Qu ality
Hypothesis. The seeker can, and does, become more se-
lective. This, in turn, increases the duration of unem-
ployment for those receiving benefits and, all other
things given, increases the level of unemployment among
those as well. Surprisingly, only one person with the
MQH trait is needed to produce a slight bulge in unem-
ployment duration, and hence in total unemployment.
Available empirical studies provide evidence consistent
with these predictions. In addition, these behavioral traits
appear to be empirically valid regardless of the culture of
the work force.
1A physical analogy may be helpful. Consider a washbasin with a con-
stant rate of water inflow, and the same constant rate of outflow at the
drain. As long as these equal rates of flows remain stationary, the wate
r
level in the basin will likewise remain stationary. Now suppose we plug
the drain for a period of 10 minutes. Clearly, the water level will rise by
an amount equal to the accumulated rates of inflow over the 10-minute
interval. After the 10-minute span, the plug is removed, and if the two
rates of flows are restored to their pre-plug rates, the new higher water
level will be sustained indefinite l y. The water level is analogous to total
unemployment.
8. Acknowledgements
Professor Emeritus of Financial Economics and Jasper

W. BERANEK ET AL.
803
N. Dorsey Professor of Economics, respectively, Univer-
sity of Georgia. We are grateful to James A. Craft and
Ronald Warren for helpf ul com ments.
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