Working Paper: CEPR ID: DP13293
Authors: Simon Jäger; Benjamin Schoefer; Samuel Young; Josef Zweimüller
Abstract: Nonemployment is often posited as a worker’s outside option in wage setting models such asbargaining and wage posting. The value of this state is therefore a fundamental determinantof wages and, in turn, labor supply and job creation. We measure the effect of changesin the value of nonemployment on wages in existing jobs and among job switchers. Ourquasi-experimental variation in nonemployment values arises from four large reforms ofunemployment insurance (UI) benefit levels in Austria. We document that wages areinsensitive to UI benefit levels: point estimates imply a wage response of less than $0.01per $1.00 UI benefit increase, and we can reject sensitivities larger than 0.03. In contrast, acalibrated 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 jobswitchers and recently unemployed workers, in areas of high unemployment, in firms withflexible pay policies, and when considering firm-level bargaining. The insensitivity of wagesto the nonemployment value we document presents a puzzle to widely used wage settingprotocols, and implies that nonemployment may not constitute workers’ relevant threatpoint. Our evidence supports wage-setting mechanisms that insulate wages from the valueof nonemployment.
Keywords: wages; bargaining; unemployment benefits; nonemployment
JEL Codes: J31; J60; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wages (J31) | nonemployment value (J17) |
| UI benefit levels (J65) | nonemployment as threat point (J63) |
| nonemployment value (J17) | wage bargaining power (J52) |
| UI benefit levels (J65) | wages (J31) |
| UI benefit levels (J65) | wage sensitivity (J31) |