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Unemployment Insurance and the Labor Market

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)

Marriott Marquis, Presidio 1 - 2
Hosted By: American Economic Association
  • Chair: Benjamin Schoefer, University of California-Berkeley

Job Seekers’ Perceptions and Employment Prospects: Heterogeneity, Duration Dependence and Bias

Andreas Mueller
,
University of Texas-Austin
Johannes Spinnewijn
,
London School of Economics
Giorgio Topa
,
Federal Reserve Bank of New York

Abstract

This paper analyses job seekers’ perceptions and their relationship to unemployment outcomes to study heterogeneity and duration-dependence in both perceived and actual job finding. Using longitudinal data from two comprehensive surveys, we document (1) that reported beliefs have strong predictive power of actual job finding, (2) that job seekers are over-optimistic in their beliefs, particularly the long-term unemployed, and (3) that job seekers do not revise their beliefs downward when remaining unemployed. We then develop a reduced-form statistical framework where we exploit the joint observation of beliefs and ex-post realizations, to disentangle heterogeneity and duration dependence in true job finding rates while allowing for elicitation errors and systematic biases in beliefs. We find a substantial amount of heterogeneity in true job finding rates, accounting for almost all of the observed decline in job finding rates over the spell of unemployment. Moreover, job seekers’ beliefs are systematically biased and under-respond to these differences in job finding rates. Finally, we show theoretically and quantify in a calibrated model of job search how biased beliefs contribute to the slow exit out of unemployment. The biases can explain more than 10 percent of the incidence of long-term unemployment.

Unemployment Benefits and Unemployment in the Great Recession: The Role of Equilibrium Effects

Kurt Mitman
,
Institute for International Economic Studies (IIES)
Marcus Hagedorn
,
University of Oslo
Fatih Karahan
,
Federal Reserve Board
Iourii Manovskii
,
University of Pennsylvania

Abstract

Equilibrium labor market theory suggests that unemployment benefit extensions affect unemployment by impacting both job search decisions by the unemployed and job creation decisions by employers. The existing empirical literature focused on the former effect only. We develop a new methodology necessary to incorporate the measurement of the latter effect. Implementing this methodology in the data, we find that benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation, employment, and a rise in unemployment.

What Hides behind the German Labor Market Miracle? Unemployment Insurance Reforms and Labor Market Dynamics

Moritz Kuhn
,
University of Bonn
Philipp Jung
,
Technical University of Dortmund
Benjamin Hartung
,
University of Bonn

Abstract

A key question in labor market research is how the unemployment insurance system affects unemployment rates and labor market dynamics. We revisit this old question studying the German Hartz reforms. On average, lower separation rates explain 76% of declining unemployment after the reform, a fact unexplained by existing research focusing on job finding rates. The reduction in separation rates is heterogeneous, with long-term employed, high-wage workers being most affected. We causally link our empirical findings to the reduction in long-term unemployment benefits using a heterogeneous-agent labor market search model. Absent the reform, unemployment rates would be 50% higher today.

Wages and the Value of Nonemployment

Simon Jaeger
,
Massachusetts Institute of Technology
Benjamin Schoefer
,
University of California-Berkeley
Samuel Young
,
Massachusetts Institute of Technology
Josef Zweimüller
,
University of Zurich

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.
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • J0 - General