Should Unemployment Benefits Decrease with the Unemployment Spell?

In this paper, we investigate whether unemployment benefits should decrease with the unemployment spell in a model where both job search intensity and wages are endogenous. Wages are set by collective agreements bargained by insiders. It is shown that a more declining time sequence of unemployment benefits leads to wage increases when the tax rate is given. Such an effect may imply an increase in unemployment and counteracts the response of job search intensity that can be found in standard job search models with a given wage distribution. Calibration exercises suggest that it costs twice as much in terms of welfare loss for the long-term unemployed workers to reduce the unemployment rate by 1% when wages are endogenous than in the standard job search model