The Displacement Effect of Reemployment Bonus Programs

Authors

Carl Davidson, Michigan State University
Stephen A. Woodbury, Michigan State University and W.E. Upjohn Institute for Employment ResearchFollow

Upjohn Author ORCID Identifier

https://orcid.org/0000-0002-4474-2415

Publication Date

7-1-1990

Series

Upjohn Institute Working Paper No. 90-02

**Published Version**

In Journal of Labor Economics 11(4): 575-605

DOI

10.17848/wp90-02

Abstract

This paper explores whether reemployment bonuses--cash payments made to insured unemployed workers who find reemployment quickly--have the unintended consequence of displacing workers who are not covered by the bonus program. We develop two partial equilibrium matching models of the labor market, patterned after the work of Diamond (1982), Mortensen (1982), and Pissarides (1984). In the first model, wages are assumed exogenous, in the second endogenous. In both, we find that the direct substitution of covered for uncovered workers (which constitutes displacement) is countered by two offsetting effects : a gross job creation effect, which results from the increased search effort of covered workers ; and a relatively small rivalry effect, in which uncovered workers search harder because of the increased difficulty they face in finding jobs. Both models suggest that, on net, the displacement effect is small to nonexistent.

Issue Date

February 1989, Revised July 1990

Subject Areas

UNEMPLOYMENT, DISABILITY, and INCOME SUPPORT PROGRAMS; Unemployment insurance; Benefits and duration