Wages and the Value of Nonemployment

University of Zurich, Department of Economics, Working Paper No. 313, 2018

115 Pages Posted: 28 Jan 2019

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: December 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 this state is therefore a fundamental determinant of wages and, in turn, labor supply and job creation. We measure the effect of changes in the value of nonemployment on wages in existing jobs and among job switchers. Our quasi-experimental variation in nonemployment values arises from four large reforms of unemployment insurance (UI) benefit levels in Austria. We document that wages are insensitive to UI benefit levels: 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. In contrast, a calibrated Nash bargaining model predicts a sensitivity of 0.39 – more than ten times larger. The empirical insensitivity holds even among workers with a priori low bargaining power, with low labor force attachment, with high predicted unemployment duration, among job switchers and recently unemployed workers, in areas of high unemployment, in firms with flexible pay policies, and when considering firm-level bargaining. The insensitivity of wages to the nonemployment value we document presents a puzzle to widely used wage setting protocols, and implies that nonemployment may not constitute workers' relevant threat point. Our evidence supports wage-setting mechanisms that insulate wages from the value of nonemployment.

Keywords: wages, bargaining, unemployment benefits, nonemployment

JEL Classification: J31, J60, J65

Suggested Citation

Jäger, Simon and Schoefer, Benjamin and Young, Samuel G. and Zweimueller, Josef, Wages and the Value of Nonemployment (December 2018). University of Zurich, Department of Economics, Working Paper No. 313, 2018. Available at SSRN: https://ssrn.com/abstract=3318365 or http://dx.doi.org/10.2139/ssrn.3318365

Simon Jäger (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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briq- Institute on Behavior & Inequality ( email )

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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 )

Zuerich, 8006
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+411 634 3724 (Phone)
+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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