Abstract:

We document that the job-finding premium of non-employed active searchers over comparable nonparticipants is surprisingly small, falls in recessions (approaching zero in the Great Recession), and declines as aggregate search effort rises. This pattern contradicts the standard assumption of a constant relative return to active search; rather, it points to a crowding-out of active search. We relax the assumption that active and passive search are perfect substitutes in matching (implying an infinite elasticity of substitution), instead estimating an elasticity of only one-fifth. We develop a sufficient statistics representation to show that aggregate search effort responds less to an economy-wide change in unemployment insurance benefits than individual-level estimates would suggest. Under a Baily-Chetty formula, crowding out weakens the disincentive effects of benefits most in recessions; in an equilibrium business-cycle model, it dampens the unemployment-duration response to benefit expansions by 40 to 60 percent.