Journal
AMERICAN ECONOMIC REVIEW
Volume 107, Issue 2, Pages 527-561Publisher
AMER ECONOMIC ASSOC
DOI: 10.1257/aer.20150528
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Funding
- Austrian Science Fund (NRN Labor Economics and the Welfare State)
- Lab for Economic Applications and Policy at Harvard University
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Contrary to standard search models predictions, past studies have not found a positive effect of unemployment insurance (UI) on reemployment wages. We estimate a positive UI wage effect exploiting an age-based regression discontinuity design in Austria. A search model incorporating duration dependence predicts two countervailing forces: UI induces workers to seek higher-wage jobs, but reduces wages by lengthening unemployment. Matching-function heterogeneity plausibly generates a negative relationship between the UI unemployment-duration and wage effects, which holds empirically in our sample and across studies, reconciling disparate wage-effect estimates. Empirically, UI raises wages by improving reemployment firm quality and attenuating wage drops.
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