Unemployment Duration and Re-employment Wages

Abstract

I take a control function approach to overcome the difficulty raised by the simultaneity issue in the estimation of the impact of unemployment duration on re-employment wages. I consider three alternative instruments, which are based on the rules of the potential duration of unemployment benefits around 2007 in Portugal. The results show that each additional month in unemployment duration is expected to decrease the re-employment wage by around 0.5%. Results are robust when I account for selectivity, either by considering the conventional Heckman two-step approach or the augmented inverse probability of censoring weighted estimation.