The Effects of Wealth and Unemployment Benefits on Search Behavior and Labor Market Transitions ∗

This paper explores the affect of wealth and unemployment benefits on the probability job seekers transition to employment by estimating a simultaneous equations model using data from the 1984 SIPP. We allow changes in wealth and unemployment benefits to affect both search intensity and reservation wages. Our results are consistent with the predictions of search models where individuals are risk averse and imperfectly insured. Higher levels of wealth or benefits increase reservation wages and decrease search effort. Both effects decrease the probability of transition. However, the majority of this decrease is due to increased reservation wages lowering the probability that a job is accepted. ∗The authors would like to acknowledge helpful input from seminar participants at the 2003 Econometri