November 20th, 2018
"Wages and the Value of Nonemployment"
Nonemployment is often posited as workers’ outside option in wage setting models such as bargaining or monopsony. 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 the value of the nonemployment option on wages in existing jobs and among job switchers. Our variation in nonemployment values arises from four large reforms of unemployment insurance (UI) benefit levels in Austria, which we study quasi-experimentally by measuring wage responses in existing and new jobs using administrative data. Our worker-level analysis reveals an insensitivity of wages to UI benefit levels with point estimates for pass-through of less than 0.01. We can reject values larger than 0.03, thus implying a pass-through of less than $0.03 per $1.00 UI increase. In contrast, a calibrated bargaining model would have predicted a ten times larger sensitivity of 0.39. The empirical insensitivity holds even among workers with a priori low bargaining power and for workers with low labor force attachment, in areas of high unemployment, with high predicted unemployment duration, in firms with flexible pay policies, among job switchers and among recently unemployed workers, and despite high take-up and eligibility – factors that either eliminate confounders or ought to render wages even more sensitive to nonemployment values. This insensitivity of wages to the nonemployment option presents a puzzle to widely used wage setting protocols in macroeconomics and implies that nonemployment scenarios may not constitute a relevant threat point in bargaining. Our evidence supports wage setting mechanisms that largely insulate wages from the value of nonemployment.