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

Posted: 30 Dec 2014

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)

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

JEL Classification: J64, J65

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. IZA Discussion Paper No. 8700. Available at SSRN: https://ssrn.com/abstract=2543894

Johannes F. Schmieder (Contact Author)

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)

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