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Unemployment insurance and wage formation

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  • von Buxhoeveden, Mathias

    () (IFAU - Institute for Evaluation of Labour Market and Education Policy)

Abstract

Wage setting models typically posit a tight relationship between the generosity of unemployment insurance (UI) and equilibrium wages. This paper estimates the effect of UI on workers’ wages. I build on a unique feature of the unemployment policy in Sweden, where workers can opt to buy supplement UI coverage above a minimum mandated level. In January 2007, the government sharply increased the price of UI, and the share of workers with supplement coverage fell from 90% to 80%. I exploit variation in the price of UI across industries to measure the effect of industry level UI-coverage on wages. My estimates suggest that a 10 percentage point reduction in the share of workers covered by supplement UI reduce wages by 5%. Since I rely on variation in UI-coverage at the industry level, these estimates contain wage adjustments from collective and individual level bargaining. Finally, I use the estimated UI-wage effect to derive bounds on worker bargaining power in a simple DMP model and find that it can be at most 0.12. This evidence support wage setting mechanisms that tie wages to the generosity of UI.

Suggested Citation

  • von Buxhoeveden, Mathias, 2019. "Unemployment insurance and wage formation," Working Paper Series 2019:13, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  • Handle: RePEc:hhs:ifauwp:2019_013
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    unemployment; insurance; youth; labor; market; wage; formation;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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