The Effect of Unemployment Benefits and Nonemployment Durations on Wages

Abstract

We estimate that unemployment insurance (UI ) extensions reduce reemployment wages using sharp age discontinuities in UI eligibility in Germany. We show this effect combines two key policy parameters: the effect of UI on reservation wages and the effect of nonemployment durations on wage offers. Our framework implies if UI extensions do not affect wages conditional on duration, then reservation wages do not bind. We derive resulting instrumental variable estimates for the effect of nonemployment durations on wage offers and bounds for reservation wage effects. The effect of UI on wages we find arises mainly from substantial negative nonemployment duration effects.(JEL J31, J64, J65)At the peak of the Great Recession, Congress extended unemployment insurance (UI) durations to 99 weeks, almost four times the usual duration. While a substantial literature has assessed the potential consequences of such UI extensions on employment (e.g., Meyer 1990; Rothstein 2011; Kroft and Notowidigdo 2015; Schmieder, von Wachter, and Bender 2012a, b;Farber and Valletta 2013), fewer papers have studied the effect of UI extensions on reemployment wages. Recent studies find that UI extensions have small effects on reemployment wages with typically negative point estimates (e.g., Lalive 2007;Card, Chetty, and Weber 2007;Centeno and Novo 2009). In this paper we show that these estimates represent the sum of several potentially offsetting components: Firstly, UI extensions increase the outside option of workers and thus may push up equilibrium wages of individuals who find jobs (either due to an increase in reservation wages or a stronger bargaining position).

Social Experiments in the Labor Market

“…In contrast to this prediction, Schmieder et al (2016) find in the context of discontinuous increases in unemployment insurance durations in Germany, that reemployment wages at different points of the unemployment spells are unaffected.…”

“…To address these difficulties, Schmieder, von Wachter, and Bender (2016) use the fact that the canonical search model has the strong prediction that forward-106 looking individuals valuing future unemployment insurance benefits will respond to a benefit extension by raising their reservation wage well before benefit exhaustion.…”

Identifying couples in administrative data

“…For example, Cullen and Gruber (2000) provide fascinating evidence that more generous unemployment insurance benefits reduce labor supply of spouses married to the benefit recipient. A lot of recent work on UI has been done with the German administrative data (e. g. Schmieder et al 2012Schmieder et al , 2016 exploiting the large number of observations and clean sources of identification such as age discontinuities in potential duration. With the possibility to link married couples it will be possible to use similar research designs to look at questions as in Cullen and Gruber (2000) to understand how households as a whole are affected by policies such as UI, active labor market policies or tax policies.…”

Locus of Control and Mothers' Return to Employment

“…at Poisson rate λ. Dechter (2014) and Schmieder et al (2015) find that periods out of the labor market are followed by a reduction in job offers. We thus allow for mothers to receive fewer offers when returning later to the labor market.…”