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Cash-on-Hand and the Duration of Job Search: Quasi-Experimental Evidence from Norway

We identify the causal effect of lump-sum severance payments on non- employment duration in Norway by exploiting a discontinuity in eligibility at age 50. We find that a severance payment worth 1.2 months' earnings at the median lowers the fraction re-employed after a year by six percentage points. Data on household wealth enable us to verify that the effect is decreasing in prior wealth, which supports the view that the severance pay effect should be interpreted as evidence of liquidity constraints. Finding liquidity constraints in Norway, despite its equitable wealth distribution and generous welfare state, means they are likely to exist also in other countries.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 12-299.

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Length: 35 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:kof:wpskof:12-299
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  1. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, 04.
  2. Guido Imbens & Karthik Kalyanaraman, 2009. "Optimal Bandwidth Choice for the Regression Discontinuity Estimator," NBER Working Papers 14726, National Bureau of Economic Research, Inc.
  3. Bratsberg, Bernt & Fevang, Elisabeth & Røed, Knut, 2010. "Disability in the Welfare State: An Unemployment Problem in Disguise?," IZA Discussion Papers 4897, Institute for the Study of Labor (IZA).
  4. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
  5. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
  6. Christoph Basten & Andreas Fagereng & Kjetil Telle, 2012. "Saving and Portfolio Allocation Before and After Job Loss," KOF Working papers 12-298, KOF Swiss Economic Institute, ETH Zurich.
  7. David S. Lee & Thomas Lemieux, 2009. "Regression Discontinuity Designs In Economics," Working Papers 1118, Princeton University, Department of Economics, Industrial Relations Section..
  8. David Card & Raj Chetty & Andrea Weber, 2006. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," NBER Working Papers 12639, National Bureau of Economic Research, Inc.
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