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Unemployment insurance and wage formation

Abstract of Working paper 2019:13

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.


Published by:

Sofia Malmer

Changed:

6/5/2019