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Abstract 6/5/2019 Unemployment insurance and wage formation

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.


For further information, please contact the author Mathias von Buxhoeveden on e-mail

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Published by:

Sofia Malmer