Wages and the Value of Nonemployment

117 Pages Posted: 5 Nov 2018

See all articles by Simon Jäger

Simon Jäger

Massachusetts Institute of Technology (MIT); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics; briq- Institute on Behavior & Inequality

Benjamin Schoefer

University of California, Berkeley

Samuel G. Young

Massachusetts Institute of Technology (MIT) - Department of Economics

Josef Zweimüller

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 4 versions of this paper

Date Written: November 2018

Abstract

Nonemployment is often posited as a worker’s outside option in wage setting models such as bargaining and wage posting. The value of nonemployment is therefore a key determinant of wages. We measure the wage effect of changes in the value of nonemployment among initially employed workers. Our quasi-experimental variation in the value of nonemployment arises from four large reforms of unemployment insurance (UI) benefit levels in Austria. We document that wages are insensitive to UI benefit changes: 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. The insensitivity holds even among workers with low wages and high predicted unemployment duration, and among job switchers and recently unemployed workers. The insensitivity of wages to the nonemployment value presents a puzzle to the widely used Nash bargaining model, which predicts a sensitivity of $0.24–$0.48. Our evidence supports wage-setting models that insulate wages from the value of nonemployment.

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Suggested Citation

Jäger, Simon and Schoefer, Benjamin and Young, Samuel G. and Zweimueller, Josef, Wages and the Value of Nonemployment (November 2018). NBER Working Paper No. w25230. Available at SSRN: https://ssrn.com/abstract=3278530

Simon Jäger (Contact Author)

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Benjamin Schoefer

University of California, Berkeley ( email )

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Samuel G. Young

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Josef Zweimueller

University of Zurich - Department of Economics ( email )

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+411 634 4907 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

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

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