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Beyond the added-worker and the discouraged-worker effects: the entitled-worker effect

Martín-Román, Ángel L. (2020): Beyond the added-worker and the discouraged-worker effects: the entitled-worker effect.

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Abstract

This paper identifies and analyses a new effect related to the cyclical behavior of labor supply: the Entitled-Worker Effect (EWE). This effect is different from the well-known Added-Worker Effect (AWE) and Discouraged-Worker Effect (DWE). The EWE is a consequence of one of the most important labor institutions: the unemployment benefit (UB). We develop a model with uncertainty about the results of the job seeking and transactions costs linked to such a search process in which a kind of moral hazard appears. This creates new incentives for workers and produces an additional counter-cyclical pressure on aggregate labor supply, but with a different foundation from that of the AWE. Finally, we show some empirical evidence supporting the EWE for the Spanish case.

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