Data: 16/04/2010

Autore: Lorenzo Cappellari - Università Cattolica - Milano

Abstract: We investigate the relationship between the evolution of individual hourly wages over the life-cycle and flexicurity in Denmark – a combination of employer flexibility in hiring and firing, income security during unemployment and a growing emphasis on activation for the unemployed. We use 24 years of population-based longitudinal administrative data on men to model individual wage dynamics, distinguishing between a long term life-cycle profile and transitory wage shocks. We characterise flexicurity using individual membership of an unemployment insurance fund, which is voluntary (80%) and provides access to part of the flexicurity bundle of income security with activation. We find that, flexicurity is associated with lower starting-wage heterogeneity, lower growth rate heterogeneity and greater wage instability. These findings are robust across industries and occupations. While we are in general unable to distinguish a moral hazard from an adverse selection cause, robustness checks suggest that moral hazard, combined with signalling, may be the relevant interpretation of our findings.
Keywords: Unemployment insurance, wage dynamics, variance components models
JEL code: J31, J65