Effects of unemployment on wages: differences between types of reemployment and types of occupation

Edler S, Jacobebbinghaus P, Liebig S. Effects of unemployment on wages: differences between types of reemployment and types of occupation. SFB 882 Working Paper Series. Vol 51. Bielefeld: DFG Research Center (SFB) 882 From Heterogeneities to Inequalities; 2015.In this article, we examine the effects of unemployment on reentry wages in Germany. Based on the theories of signaling effects, human capital, and occupational segmentation, we discuss the heterogeneity of reemployment wages among different types of reemployment and among different occupations. The empirical analysis is based on the German social security records of the Linked Employer–Employee Data from IAB (LIAB). Our results indicate that the wage effects of unemployment vary considerably across occupations. First, occupations characterized by higher rates of participation in further education showed stronger negative effects of unemployment on reentry wages. This finding indicates that occupations that involve less technological change are associated with a slower depreciation of specific human capital. Second, the lost wages after unemployment are higher in occupations with a typically higher rate of unemployment, indicating that an oversupply of employees leads to lower bargaining power on the part of workers. Third, the negative effect of unemployment is reduced if employees are reemployed by a former employer within one year of dismissal. This finding reflects the fact that employers already know the productivity of former employees and can thus retain company-specific human capital