Question

Explain the “JOB SEARCH THEORY” and its relevance to unemployment. How would an increase in Employment Insurance[1] benefits affect the Job Search Theory

Answer 1

The Job search theory explains the optimal time it takes for an individual to search for an appropriate job, before finalizing one job to accept. It explains the factors which affect the job search time period: reservation price, cost of search, unemployment benefits etc.

Higher the time spent looking for job, greater would be the unemployment rate.

An increase in employment insurance benefits increases the search time of job, as the opportunity cost of looking for job increases and the individual is still making money and making use of benefits while being unemployment.