Human Capital Depreciation and Stigma Effects in Unemployed Workers’ Re-Employment Wages

Using the data from the Survey of Income and Program Participation (SIPP) between 1996 and 2013, the effects of unemployment duration on the re-employment wages for workers 40 years of age and older are empirically estimated using a quasi-structural model. The findings indicate that the re-employment wages for workers over age 40 decrease by 0.9% for each month that a worker remains unemployed. Hence, the longer the worker remains unemployed, the lower are his/her re-employment wages. The duration of unemployment effect is decomposed into the human capital depreciation and stigma effects with the stigma effect referring to potential employers’ perception, or possible misperception, of older workers as being lower productivity workers the longer they remain unemployed. The estimated coefficient of the human capital depreciation is statistically insignificant, which indicates that the observed reduction in re-employment wages for older workers is mainly explained by the stigma effect.