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Why are marginal workers unemployed: Low productivity or high opportunity cost of employment?

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  • Darougheh, Saman

Abstract

15% of Danish workers account for 60% of unemployment. Are these workers unemployed more frequently because of their lower productivity or higher opportunity costs of employment? Using administrative data linking workers to their earnings, wealth, debt, health records, parental backgrounds, partners, job types, and firm-level value added, I find strong evidence that higher unemployment risk reflects lower productivity rather than higher pecuniary opportunity costs. A calibrated heterogeneous-agents model with segmented labor markets is consistent with these findings: productivity differences and non-pecuniary opportunity costs explain most of the unemployment gap. This matters for social policy: optimal unemployment insurance is higher than if marginal workers’ unemployment was predominantly due to a high pecuniary opportunity cost.

Suggested Citation

  • Darougheh, Saman, 2026. "Why are marginal workers unemployed: Low productivity or high opportunity cost of employment?," Labour Economics, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:labeco:v:99:y:2026:i:c:s092753712500171x
    DOI: 10.1016/j.labeco.2025.102847
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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