Wages and the Value of Nonemployment*

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 hired out of unemployment. 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.

Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden

“…In the public economics literature, the received wisdom, based on the canonical competitive labor market model, is that the incidence of payroll taxes, even if nominally paid by employers, ultimately falls on workers' net market wages, leaving firms' gross labor costs unchanged. 2 In this paper, we analyze a large, long-lasting employer-borne payroll tax cut for young workers in Sweden. At the market level, we fully reject the sharp differentials in wages predicted by the canonical model: the directly treated young workers' market wages show no increase at all relative to the slightly older ineligible control group.…”

“…The United States has a history of targeted employer credits for disadvantaged groups(Katz 1998). Several European countries have experimented with payroll tax cuts for the young or the elderly (see, e.g., OECD 2017) 2. The underlying assumption is that aggregate labor demand is much more elastic than aggregate labor supply (see, e.g.,Fullerton and Metcalf 2002).…”

Outside Options Drive Wage Inequalities in Continuing Jobs: Evidence From a Natural Experiment

“…with φ denoting the employee bargaining power relative to the employer bargaining power (Jäger et al, 2020). The function V(p,w) is the lifetime expected utility of a worker who is employed at a firm with productivity p and receives wage w. Assume that the match-or firm-specific productivity at the current firm is p o .…”

“…Many papers explore wage determinants based on the classic Nash bargaining model (Mortensen and Pissarides 1999;Burdett and Mortensen, 1998;Pissarides 2000, chapter 1; Michelacci and Suarez, 2006;Cahuc et al, 2006;Jäger et al, 2020). These wage bargaining and wage posting models "give primacy to the bargainers' outside options", in comparison to bargaining power and productivity as wage determinants (Hall and Krueger 2010).…”

“…2 The empirical evidence on the impact of the value of non-employment or unemployment on wages indeed is thin. One of the few papers that assess the impact of a change in unemployment benefits on wages, Jäger et al (2020), shows no impact. The authors argue that wages of employees in continuing jobs may be influenced by outside wages options rather than the unemployment benefits.…”