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

Abstract

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Does Extending Unemployment Benefits Improve Job Quality?

“…For instance, three prominent papers that use quasi-experimental designs and administrative data provide estimates of the UI wage effects that are not significantly different from zero (Card et al (2007a), Lalive (2007) and Van Ours and Vodopivec (2008)). Moreover, Schmieder et al (2014) find a statistically significant negative UI wage effect. We show that these different empirical findings are not in contradiction with theory once we take into account that an unemployed agent's job opportunities, skills, and UI benefits decrease the longer she remains without a job (duration dependence).…”

“…4 The above-mentioned differences in empirical estimates can thus originate from variation in the relative importance of search and selectivity margins across different studied populations. Such heterogeneity would be reflected in a negative correlation be- 3 The intuition of two offsetting forces has been present in discussions of the effect of UI on job quality (For instance, see Addison and Blackburn (2000), Degen and Lalive (2013), and Schmieder et al (2014)). For example, Addison and Blackburn (2000) mention: "we tend to expect reservation wages to decline with spell length ... as a result of stigmatization or human capital depreciation effects.…”

The Cost of Human Capital Depreciation During Unemployment

“…To calibrate the model to the US economy I make use of the model's prediction that workers' wages are on average negatively affected by the length of their unemployment spells, and the empirical evidence by Schmieder, von Wachter and Bender (2013) on the effect of unemployment duration on workers' wages. When skill loss is the only source of inefficiency, restoring constrained-efficiency entails a drop in the average unemployment rate in the range of 0.92 to 0.27 percentage points, indicating that the composition externality is quantitatively relevant.…”

The Career Prospects of Overeducated Americans

“…Schmieder et al, 2013). The scarring effects associated with overeducation could also account for some of the negative wage effects of graduating during a recession which have been recently uncovered in the literature (Kahn, 2010, Liu et al, 2012, Oreopoulos et al, 2012, and Altonji et al, 2013.…”

“…It also suggests that higher overeducation persistence is one of the mechanisms through which past unemployment affects future wages (see e.g. Schmieder et al, 2013).…”