Using a random sample of U.S. unemployment insurance (UI) applicants from 2002–09, we find that unemployment duration (as measured by the time spent waiting to apply for benefits) has a negative and nonlinear effect on reservation wages, suggesting job search is a nonstationary process characterized by declining welfare even in the very early stages of unemployment. Using UI administrative variables as instruments to address the endogeneity of the waiting time to apply, we find that the reservation wage falls more rapidly for women than for men, for blacks than for whites, and for those who were discharged for cause than for those who voluntarily quit. These differential effects suggest that unemployment may exacerbate the earnings inequality we have witnessed over the last decade. Our results are unique in that they are based on short-term, incomplete spells of unemployment that are very precisely measured in weeks.
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