Wages and the Value of Nonemployment

Abstract

Nonemployment is often posited as a worker's outside option in wage setting models such as bargaining and wage posting. The value of this state is therefore a fundamental determinant of wages and, in turn, labor supply and job creation. We measure the effect of changes in the value of nonemployment on wages in existing jobs and among job switchers. Our quasi-experimental variation in nonemployment values arises from four large reforms of unemployment insurance (UI) benefit levels in Austria. We document that wages are insensitive to UI benefit levels: point estimates imply a wage response of less than $0.01 per $1.00 UI benefit increase, and we can reject sensitivities larger than 0.03. In contrast, a calibrated Nash bargaining model predicts a sensitivity of 0.39-more than ten times larger. The empirical insensitivity holds even among workers with a priori low bargaining power, with low labor force attachment, with high predicted unemployment duration, among job switchers and recently unemployed workers, in areas of high unemployment, in firms with flexible pay policies, and when considering firm-level bargaining. The insensitivity of wages to the nonemployment value we document presents a puzzle to widely used wage setting protocols, and implies that nonemployment may not constitute workers' relevant threat point. Our evidence supports wage-setting mechanisms that insulate wages from the value of nonemployment.

Marginal Jobs and Job Surplus: A Test of the Efficiency of Separations

“…In Jäger et al (2018) we have documented that Austrian wages appear unresponsive to UI benefit level shifts (studying reforms that did not entail separations). We cannot credibly study wage effects in the present context given the large attrition implied by the separation effects.8 UI benefits are not taxed.…”

“…The net replacement ratio, UI benefits over the wage net of social security contributions and income taxes is around 55%, slightly higher than in the US. SeeJäger et al (2018) for details on replacement rates.…”

Unemployment Benefit Duration and Startup Success

“…Thus, the UI system should design optimal PBD in such a way that considers both transitions to dependent employment and to self-employment, as well as their outcomes. Moreover, our findings can improve insights into the so-called value of non-employment, which is important for the results of many wage-bargaining models (Jäger et al, 2019).…”

The Equilibrium and Spillover Effects of Early Retirement

“…After the abolition, the non-Coasean model would therefore predict resilience in response to worker-surplus shocks -but analogously not necessarily to firm surplus shifts. Consequently, if firm-surplus shocks account for most post-abolition separation, then the non-Coasean model Jäger et al (2018) document that Austrian wages appear unresponsive to UI benefit level shifts (studying reforms that did not entail separations). We cannot credibly study wage effects in the present empirical setting given the large attrition implied by the separation effects.…”

“…A prediction of this view is that smaller shifts in outside options should not induce workers to separate. Indeed, Jäger et al (2018), who study wage responses in response to UI benefit changes from different Austrian reforms, document that such smaller benefit shifts did not entail separation effects even among older workers and even during the 1980s in Austria.…”