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 this state is therefore a fundamental determinant of wages and, in turn, labor supply and job creation. We measure the effect of changes in the value of nonemployment on wages in existing jobs and among job switchers. Our quasi-experimental variation in nonemployment values arises from four large reforms of unemployment insurance (UI) benefit levels in Austria. We document that wages are insensitive to UI benefit levels: 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. In contrast, a calibrated 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 job switchers and recently unemployed workers, in areas of high unemployment, in firms with flexible pay policies, and when considering firm-level bargaining. The insensitivity of wages to the nonemployment value we document presents a puzzle to widely used wage setting protocols, and implies that nonemployment may not constitute workers' relevant threat point. Our evidence supports wage-setting mechanisms that insulate wages from the value of nonemployment. examine the wage pressure channel of UI. 4 Burdett and Mortensen (1998) and Manning (2011) are references for wage posting models. 5 Shimer (2005), Hall and Milgrom (2008), Chodorow-Reich and Karabarbounis (2016) and Hall (2017) discuss the role of the sensitivity of the Nash wage to outside options for employment fluctuations in matching models. 6 We also show that the model makes the same predictions for the sensitivity if treatment and control workers occupy segmented markets. 7 Manning (2011) and Card et al. (2018) review rent sharing estimates. In Appendix D, we translate the reduced-form elasticities into an upper bound for worker bargaining power. 8 Only the 1989 reform has been studied, with a focus on unemployment spell duration (Lalive et al., 2006).2 mandatory registration and because of long unemployment spells. Second, Austrian workers who quit are eligible for benefits -crucial for UI to indeed shift workers' threat points. 9 Third, Austrian UI does not feature experience rating. Fourth, even after UI benefit exhaustion, a significant share of Austrian workers receives means-tested benefits that, while lower in levels, move nearly one-to-one with a worker's previous UIB levels and thus our variation. We first visually analyze each reform nonparametrically by plotting raw data. We sort workers by their UI reference wage, and then plot their wage growth before and after each reform, along with the between-worker reform-induced variation in UI benefit levels. The raw data do not reveal any wage responses even after two years -in stark contrast to the large predicted wage effects from our cal...