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The Unemployment Trap Meets the Age-Earning Profile

Bruce Chapman (), James Jordan, Ken Olivier and John Quiggin ()

No 415, CEPR Discussion Papers from Centre for Economic Policy Research, Research School of Economics, Australian National University

Abstract: The relative costs of taking employment or receiving welfare are usually understood through comparisons of a person’s social security entitlements and their wage alternative, known as replacement rates. In some situations it appears that the additional income from working is negligible, and this is said to constitute an “unemployment trap”. However, conventional replacement rates ignore the fact that age-earnings profiles slope upward through the acquisition of labour market experience. We offer a dynamic reinterpretation and compare alternative calculations for Australia in 2000. The usual and incorrect approach exaggerates significantly the likelihood of unemployment traps, but the presence of children mitigates considerably, and can even reverse, this assessment.

Keywords: unemployment traps; social security; age-earnings profiles; wages (search for similar items in EconPapers)
JEL-codes: J10 J22 I30 I38 (search for similar items in EconPapers)
Date: 2000-05
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