Using the variation in potential duration of unemployment benefits to estimate the causal effect of unemployment duration on re-employment wages

This paper estimates the impact of unemployment duration on re-employment wages. Using administrative data on the Portuguese unemployed between 2005 and 2012, we employ a control function framework through the definition of potential duration of unemployment benefits to solve the simultaneity present in the re-employment wage equation. We consider three alternative strategies to predict the unemployment duration: the potential duration of unemployment benefit, the change in the rules of the potential duration with the 2007 reform, and the age discontinuity in the potential duration rules of unemployment benefit. The results show that each additional month in unemployment duration is expected to decrease the reemployment wage by 0.5%. When we analyse the sensitiveness of our results, there seems to be presence of a moral hazard behaviour in case the individual became unemployed by mutual agreement. Moreover, the negative effect of unemployment duration on re-employment wages shows a relatively high persistence, which only vanishes three years after the date of re-employment. Therefore, additional job assistance programs may be justified in Portugal (Carneiro et al., 2015).