The Differential Wage Effect of Unemployment Insurance by Entitlement Status: A New Piece of the UI-Wages Puzzle? [job market paper]

I study the differential impact of an increase in the unemployment insurance (UI) benefit rate on wages by UI entitlement status, thereby addressing overlooked aspects of the UI-wages puzzle identified by Jäger, Schoefer, Young, & Zweimüller (2020), who find wage effects of UI that are an order of magnitude smaller than predicted by theory. First, I show that while theory predicts a positive wage effect of UI for individuals with UI entitlement (eligibles), it predicts a negative effect for individuals without UI entitlement (ineligibles). Second, I estimate the wage effect of UI separately for eligible and ineligible individuals in the context of the 2001 Austrian UI reform, using difference-in-differences and event study methods. The results suggest no statistically or economically meaningful wage effect even among individuals who are eligible to receive UI benefits. These findings both confirm and extend the UI-wages puzzle. Third, I contribute empirically by demonstrating — with the help of a simulation study — that the baseline estimation approach of Jäger et al. (2020) may make the detection of a UI-wage effect impossible, even if one exists.