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

52 Pages Posted: 28 Dec 2013

See all articles by Johannes F. Schmieder

Johannes F. Schmieder

Boston University - Department of Economics; IZA; National Bureau of Economic Research (NBER)

Till von Wachter

Columbia Business School - Economics Department; IZA Institute of Labor Economics

Stefan Bender

Government of the Federal Republic of Germany - Institute for Employment Research (IAB)

Date Written: December 2013

Abstract

This paper provides quasi-experimental estimates of the causal effect of long-term unemployment on wages. Using standard job search theory, the paper derives and tests conditions on reemployment wages under which Unemployment Insurance (UI) extensions can be used as instrumental variables (IV) for unemployment duration. Using a regression discontinuity design, the paper shows that UI extensions at age thresholds reduced reemployment wages of job searchers in Germany. The UI extensions do not affect the reemployment wages conditional on the month of unemployment exit, implying reservation wages do not bind on average. Hence, UI extensions affect mean wages only through unemployment durations. Our IV estimates imply substantial negative effects of unemployment duration on wages of 0.8% per month.

Suggested Citation

Schmieder, Johannes F. and von Wachter, Till and Bender, Stefan, The Causal Effect of Unemployment Duration on Wages: Evidence from Unemployment Insurance Extensions (December 2013). NBER Working Paper No. w19772. Available at SSRN: https://ssrn.com/abstract=2372484

Johannes F. Schmieder

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

IZA ( email )

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Till Von Wachter

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Stefan Bender

Government of the Federal Republic of Germany - Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany
+49 911 179 3082 (Phone)
+49 911 179 3297 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
19
Abstract Views
209
PlumX Metrics