Wages,selectivity, and vacancies: Evaluating the short-term and long-term impact of the minimum wage on unemployment

Using a circular matching model (Marimon R, Zilibotti F. Unemployment vs. mismatch of talents: Reconsidering unemployment benefits. Economic Journal 1999;109; 266–291), where the wage setting is similar to Weiss (Weiss A. Job queues and layoffs in labor markets with flexible wages. Journal of Political Economy 1980; 88; 526–538), we reexamine Card and Krueger's (Card, D., Krueger, A. Myth and Measurement, the New Economics of the Minimum Wage. Princeton University Press; 1995) intuition on the impact of the minimum wage on unemployment. In the short term, a rise in the minimum wage increases the employment level by making firms less selective. In the long term, numerical simulations show that, despite the reduction of job creation, introducing a minimum wage may lower unemployment as soon as workers and jobs are sufficiently differentiated. However, beyond some limit, the wage increase raises unemployment whatever the degree of differentiation is.     

Technological choices and unemployment benefits in a matching model with heterogenous workers

This article aims at understanding the interactions between public policies, such as unemployment benefit systems, and firms’ technological choices. For this purpose, we use a matching model in which workers are vertically differentiated and where the nature of jobs is endogenous. We show that an improvement in unemployment benefits leads to an increase in productivity by making agents more selective and jobs more complex. However, the impact on labour market participation is negative.     

Do unemployment benefits promote or hinder job reallocation?

According to recent and largely untested theories, unemployment benefits (UBs) could improve the extent and quality of job reallocation even at the cost of increasing unemployment. In this paper, we use a new set of yearly panel data from a large number of countries to evaluate empirically the relationship between unemployment benefits and job reallocation. Unlike previous work assessing the effects of UBs on labor market stocks, we focus on flows and rely on policy “experiments,” notably the introduction from scratch of unemployment benefits in many countries. We exploit the longitudinal nature of our data to lessen the potentially important selection, endogeneity, and omitted variable problems. We find a positive, sizable, and significant effect of the introduction of UBs on job reallocation, arising mainly from the job destruction margin although this effect fades away over time. These findings appear to be robust to changes in the countries in the sample, control variables or estimation methods. We discuss to what extent our results are consistent with equilibrium matching models with or without endogenous sorting of workers into jobs providing entitlement to UBs and stochastic job matching.     

The labor market effects of introducing unemployment benefits in an economy with high informality

Unemployment benefit systems are nonexistent in many developing economies. Introducing such systems poses many challenges which are partly due to the high level of informality in the labor markets of these economies. This paper studies the consequences on the labor market of implementing an unemployment benefit system in economies with large informal sectors and high flows of workers between formality and informality. We build a search and matching model with endogenous destruction, on-the-job search, and intersectoral flows, where agents in the economy decide optimally whether or not to formalize jobs. We calibrate the model for Mexico, and show that the introduction of an unemployment benefit system, where workers contribute when employed in the formal market and collect benefits when they lose their jobs, even if they obtain informal jobs, can lead to an increase in formality in the economy, while also producing small increases in unemployment. The exact impact of incorporating such benefits depends on the relative strength of two opposing effects: the generosity of the benefits and the level of the contributions that finance those benefits. We also show important policy complementarities with other interventions in the labor market. In particular, combining the unemployment benefit program with policies that reduce the cost of formality, such as lower employment taxes and firing costs, can produce greater decreases in informality and lower impacts on unemployment than when the program is applied in isolation.     

Does reducing unemployment insurance generosity reduce job match quality?

This paper analyzes how a change in Slovenia's unemployment insurance law affected the quality of jobs workers found after periods of unemployment. Taking advantage the “natural experiment” we show through difference-in-differences estimation results that reducing the potential duration of unemployment benefits had no detectable effect on wages, on the probability of securing a permanent rather than a temporary job, or on the duration of the post-unemployment job.     

Partial unemployment insurance benefits and the transition rate to regular work

In Finland, unemployed workers who are looking for a full-time job but take up a part-time or very short full-time job may qualify for partial unemployment benefits. In exchange for partial benefits, these applicants must continue their search of regular full-time work. This study analyzes the implications of working on partial benefits for subsequent transitions to regular employment. The timing-of-events approach is applied to distinguish between causal and selectivity effects associated with the receipt of partial benefits. The results suggest that partial unemployment associated with short full-time jobs facilitates transitions to regular employment. Also part-time working on partial benefits may help men (but not women) in finding a regular job afterwards.     

Welfare states and unemployment

Summary This paper studies equilibrium unemployment in a search model where the government both provides liberal unemployment insurance and taxes labor at high progressive tax rates. It is shown how progressive income taxation can counteract a high unemployment rate under generous unemployment insurance. In particular, high marginal taxes reduce workers' incentives to switch jobs in response to changing economic opportunities. This lower labor mobility reduces unemployment but at the cost of a less efficient labor allocation.We are grateful to William Dupor, Krishna Kumar, and Ashok Rai for excellent computer programming.     

Sectoral shifts, diversification and regional unemployment: evidence from local labour systems in Italy

Using Local Labour Systems (LLSs) data, this work aims at assessing the effects of sectoral shifts and industry specialization patterns on regional unemployment in Italy over the years 2004–2008. Italy represents an interesting case study because of the high degree of spatial heterogeneity in local labour market performance and the well-known North–South divide. Furthermore, the presence of strongly specialized LLSs (Industrial Districts, IDs) allows us to test whether IDs perform better than highly diversified urban areas thanks to the effect of agglomeration economies, or viceversa. Building on a semiparametric spatial auto-regressive framework, our empirical investigation documents that sectoral shifts and the degree of specialization exert a negative role on unemployment dynamics. By contrast, highly diversified areas turn out to be characterized by better labour market performances.     

Persistence and stochastic convergence of euro area unemployment rates*

This paper analyzes unemployment rates in the euro area (EA) countries to test for EA-related benefits and economic integration of the EA in the form of lower unemployment rates and unemployment rates convergence. We employ recently developed unit root tests with structural breaks and non-normal errors to analyze the persistence, test the stochastic convergence and locate structural break(s) in EA unemployment rates from 1995q1 to 2016q2. Our results imply a certain degree of unemployment hysteresis in the EA. Even though the results support the stochastic convergence of the majority of EA countries, we find that EA membership is not a sufficient condition for stochastic convergence. Nevertheless, EA-related breaks are followed by the periods of convergence to the EA11 average. Crisis-related breaks are followed by the periods of divergence. Although providing initial benefits, EA is not functioning as an optimal currency area.     

Benefit entitlement and unemployment duration: The role of policy endogeneity

The potential duration of benefits is generally viewed as an important determinant of unemployment duration. This paper evaluates a unique policy change that prolonged entitlement to regular unemployment benefits from 30 weeks to a maximum of 209 weeks for elderly individuals in certain regions of Austria. In the evaluation, we explicitly account for the fact that the program was an endogenous policy response to deteriorating labor market conditions for older workers in certain regions and sectors. The main results are: (i) REBP reduced the transition rate to jobs by 17%; (ii) accounting for endogenous policy adoption is important and quantitatively significant.     

Endogenous job specialization

According to some authors, technical change contributes to the explanation of the increase in equilibrium unemployment by making jobs more and more specialized. Here, we assume that firms optimally adapt the specialization of jobs to overall labour market conditions. Using a matching labour market framework, we show that the increase in unemployment can explain the higher specialization of jobs.     

Individual discount rates forecast county-level unemployment change

We use a national survey to estimate individuals’ discount rates for job creation in the community and test whether impatience for jobs is associated county-level unemployment change outcomes in subsequent years. Our results suggest that impatience for jobs is a possible forecast variable for future modelling efforts. To explore whether the impatience effect is general or simply limited to attitudes about local job creation, the same survey asked about discount rates for local amenity development and personal financial windfall. We find that job growth discount rates perform best for forecasting.     

Long-term unemployment and short-term unemployment benefits: The changing nature of non-employment subsidies in Central and Eastern Europe

Non-employment rates in all central and eastern European countries have increased dranatically thoroughout the transition and are currently larger than those of the lowest income OECD countries. Non-employment benefits other than unemployment benefits are providing income support to this growing number of able-bodied individuals out of work. Under the present design of unemployment benefits and social assistance, there may be serious incentive problems related to the shift from unemployment benefits to other, means-tested, non-employment benefits and this shift occurs in transition countries at rather early stages of an unemployment spell; these incentive problems are bound to become particularly acute in a less inflationary environment.     

Unemployment insurance,recalls, and experience rating

In the United States, almost half of the workers who separated from their jobs ended their unemployment spell by returning to work for their last employer. In this study, we explore the impact of the experience rating (ER) system on recalls. In states using reserve ratio ER, and for a firm that is not at the minimum or the maximum tax rate, each layoff of a worker receiving unemployment benefits increases the future tax rate while each recall reduces it. This provides a natural incentive for firms to recall former workers receiving unemployment benefits. We use the Quarterly Workforce Indicators dataset, which provides information on recalls at the county level, and exploit the differences in tax schedule across states to estimate the impact of ER on recalls. We show that the recall share from hires increases with the degree of ER. We then develop a search and matching model with different unemployment insurance (UI) status, endogenous UI take-up, endogenous separations, recalls, and new hires. We illustrate that this model reproduces the effects of ER on recalls admirably. We show that an increase in the intensity of ER translates into a higher recall share at the steady state, especially for unemployed workers collecting unemployment benefits. We then use this model to analyze the labor market dynamics under alternative financing schemes. We show that ER has stabilization virtues—the higher the degree of ER, the less volatile the unemployment rate.     

A Schumpeterian model of equilibrium unemployment and labor turnover

This paper constructs a general equilibrium model of equilibrium unemployment by combining an endogenous growth model with a variant of equilibrium search theory. The analysis offers two explanations for the causes of widening wage gap between skilled and less-skilled labor, and rising unemployment rate among the less skilled: technological change in the form of an increase in the size of innovations or skilled labor saving technological change in R&D activity. In addition, the model identifies two distinct effects of faster technological progress on the aggregate unemployment rate. First, it increases the rate of labor turnover and therefore increases the aggregate unemployment rate – the creative destruction effect. Second, it creates R&D jobs, which offer workers complete job security, and consequently reduces the aggregate unemployment rate – the resource reallocation effect.     

How an export boom affects unemployment

Does trade affect the equilibrium rate of unemployment? To answer this question, we propose a small open economy model that incorporates realistic features of labour markets. The model predicts that a sustained improvement in the terms of trade lowers unemployment. We test this prediction for the case of Australia, an economy that is subject to large terms of trade movements. We use a novel technique to estimate the structural model based on a combination of traditional econometric procedures and the calibration of time-varying parameters. Both reduced form and the structural estimates reveal strong evidence that higher export prices, capital accumulation in tradeable goods industries and lower unemployment benefits reduce the equilibrium unemployment rate.     

Sectoral shifts and unemployment persistence

This paper deals with possible explanations of unemployment persistence within a sectoral approach to the Austrian labour market. First the concept of unemployment persistence is specified in terms of the time series properties of the unemployment rate. Sectoral job gains and job losses form the labour market flows in this approach. The standard matching model is replaced then by a model of the competition between the unemployed and new entrants in the labour market for new jobs as an ‘adding up’ demand system of the AIDS type. The estimations of different system specifications indicate, that the sectoral structure of job gains plays a role in the competition mechanism between unemployed workers and new entrants.     

Does unemployment insurance crowd out home production?

In this paper, we study the interaction between self insurance and public insurance. In particular, we provide evidence on a negative correlation between unemployment insurance benefits and home production using the American Time Use Survey (ATUS) and the state-level unemployment insurance data of the U.S. The empirical results suggest that moving to a two times more generous state would decrease time spent on home production about 22% for the unemployed. Then, we pursue a quantitative assessment of this empirical finding using a dynamic competitive equilibrium model in which households do home production as well as market production. The model is able to generate the empirical facts regarding the unemployment benefits and home production. The fact that unemployment insurance benefits crowd out home production is interpreted as a substitution between the two insurance mechanisms against loss of earnings during unemployment spells.     

Re-employment probabilities of unemployment benefit recipients

This article studies transitions out of unemployment for benefit recipients in Spain. We analyse the duration of unemployment, distinguishing between spells that end in recall (workers returning to the previous employer) and spells that end in exit to a new job. This distinction allows us to find that the recall hazard rate increases around the time of exhaustion of benefits. However, this happens only for workers receiving Unemployment Insurance (UI). Because we are unable to replicate this result for workers receiving Unemployment Assistance (UA), we believe the finding lends support to the hypothesis that in Spain firms and workers make a strategic use of UI.     

Immigration and the unemployment benefit programme in Australia

A widely held view is that immigrants contribute to public debt through their over representation in the unemployment benefit programme. An empirical investigation, based on the 1990 Income Distribution Survey, finds support for this view. In contrast to the US and Canadian studies, this paper observes that the probability of receiving unemployment benefits is higher for immigrants than the native-born population and immigrants, who participate in the unemployment benefit programme, also receive a greater amount of unemployment benefits.