Wages and the Value of Nonemployment

CRR WP 2020-4

119 Pages Posted: 9 Feb 2020

See all articles by Simon Jäger

Simon Jäger

Massachusetts Institute of Technology (MIT)

Benjamin Schoefer

University of California, Berkeley

Samuel G. Young

Massachusetts Institute of Technology (MIT) - Department of Economics

Josef Zweimüller

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: January 2020

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.

Suggested Citation

Jäger, Simon and Schoefer, Benjamin and Young, Samuel G. and Zweimüller, Josef, Wages and the Value of Nonemployment (January 2020). CRR WP 2020-4 . Available at SSRN: https://ssrn.com/abstract=3520196 or http://dx.doi.org/10.2139/ssrn.3520196

Simon Jäger

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
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Cambridge, MA 02139-4307
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Benjamin Schoefer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Samuel G. Young

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

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Josef Zweimüller (Contact Author)

University of Zurich

Rämistrasse 71
Zürich, CH-8006
Switzerland

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