Unemployment and its scarring effect on wages in Germany: evidence from linked employer-employee data

Purpose - Assess and compare scarring effects of unemployment in Germany to other countries and to consider firm heterogeneity. Design/methodology/approach - The author uses linked employer-employee data to analyze the effect of unemployment and its duration on future wages in Germany. Using administrative data on workers and firms in Germany and considering registered and unregistered unemployment episodes, the results show long-lasting wage losses caused by unemployment incidences. Furthermore, the estimations indicate that unemployment duration as well as selectivity into firms paying lower wages is of particular relevance for the explanation of wage penalties of re-employed workers. Findings - Unemployment causes massive and persistent wage declines in the future, which depend on the unemployment duration. Furthermore, reduced options of unemployed workers and selectivity in firms contribute to a large part of unemployment scarring. Practical implications - Findings are relevant for current debates on unemployment and can help design measures to avoid huge costs of unemployment. Originality/value - This paper analyses long-term unemployment scarring by considering not only unemployment duration but also selectivity in firms and its effect on the scarring effect.