Oxford Economic Papers Advance Access originally published online on June 3, 2004
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Oxford Economic Papers 56 (2004), 437-460
© Oxford University Press 2004; All rights reserved
Dynamic wage bargaining if benefits are tied to individual wages
* Department of Economics, University of Regensburg,
D-93040 Regensburg, Germany and IZA, Bonn, Germany;
e-mail: thomas.beissinger{at}wiwi.uni-regensburg.de
Socioeconomic Institute, University of Zurich, Zurich, Switzerland
In dynamic wage bargaining models it is usually assumed that individual unemployment benefits are a fraction of the average wage level. In most countries, however, unemployment benefits are instead tied to the previous level of individually earned wages. We show how the analysis has to be modified if this fact is taken into account and compare our findings for the wage-setting curve with outcomes under other unemployment compensation schemes. From this comparison it becomes evident how the shape and position of the wage-setting curve depends on the specification of the unemployment benefit system. We also demonstrate that a reduction of unemployment benefits of those who become unemployed after the bargaining period leads to higher equilibrium unemployment.