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

Johannes F. Schmieder, Till von Wachter, Stefan Bender

NBER Working Paper No. 19772
Issued in December 2013, Revised in October 2014
NBER Program(s):Labor Studies, Public Economics

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.

Supplementary materials for this paper:

• data appendix

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w19772

Published: The Effect of Unemployment Benefits and Nonemployment Durations on Wages Johannes F. Schmieder Till von Wachter Stefan Bender AMERICAN ECONOMIC REVIEW VOL. 106, NO. 3, MARCH 2016 (pp. 739-77)

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