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The Causal Effect of Unemployment Duration on Wages: Evidence from Unemployment Insurance Extensions

Johannes Schmieder, Till von Wachter () and Stefan Bender ()
Additional contact information
Till von Wachter: University of California, Los Angeles

No 8700, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper estimates the causal effect of long-term unemployment on wages. Job search theory implies that if Unemployment Insurance (UI) extensions do not affect wages conditional on the month of unemployment exit, then reservation wages do not bind on average. Then, UI extensions affect mean wages only through unemployment durations and are valid instrumental variables (IV). Using a regression discontinuity design, we find that UI extensions in Germany reduced job searchers' reemployment wages on average, but did not affect wages conditional on unemployment duration. Resulting IV estimates imply substantial negative effects of unemployment duration on wages of 0.8% per month.

Keywords: long-term unemployment; wage losses; unemployment insurance (search for similar items in EconPapers)
JEL-codes: J64 J65 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2014-12
New Economics Papers: this item is included in nep-ias, nep-lab and nep-lma
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Working Paper: The Causal Effect of Unemployment Duration on Wages: Evidence from Unemployment Insurance Extensions (2013) Downloads
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