Implications of the Illinois Reemployment Bonus Experiments for Theories of Unemployment and Policy Design


Reemployment bonus experiments offer large lump sum payments to
unemployment insurance (UI) recipients who find a job quickly. Such
experiments are underway or have been recently completed in four states. This
paper analyzes the results from Illinois and discusses the implications of the
experiments for theories of unemployment and policy design. I examine the
hazard rate of exit from unemployment and find that it is significantly higher
for the experimental groups, but only during the period of bonus eligibility.
Both labor supply and search theories of unemployment are shown to suggest a
rise in the reemployment hazard just before the end of bonus eligibility and
to suggest larger effects of the fixed amount bonus for lower income groups.
Only weak support is found for these hypotheses, which suggests limitations of
the models of unemployment. Some modifications of the models are suggested.
The experiments demonstrate the effects of economic incentives on job
finding behavior but they do not show the desirability of a permanent
reemployment bonus program. Evidence from another sample suggests that as
many as half of those who received a reemployment bonus returned to their
previous employer, so that a bonus program that pays people returning to their
last employer would provide a strong encouragement to temporary layoffs. A
discussion of UI claim filing behavior suggests that a permanent program could
well increase the frequency or promptness of filing, thus reducing any
financial advantages of a bonus program.

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National Bureau of Economic Research No. 2783, December 1988.
Working Papers