Is Unemployment Really Scarring? Effects of Unemployment Experiences on Wages

This paper looks at the effects of unemployment on re-employment wage for men using the first seven waves of the British Household Panel Survey (BHPS) conducted over the period 1991- 1997. In particular, how the effect of an interruption changes over time, and whether the type of interruption itself matters or not for re-employment wage, are addressed. The issue of sample selection and unobserved heterogeneity are also addressed in the analyses. This study finds that, unemployment does have a scarring effect on individuals who experience it, in terms of earnings losses on re-employment jobs. In particular it finds that, an unemployed individual on returning to work will earn about 6% less than an otherwise equivalent individual who makes an employment to employment transition, during the first year of employment. This differential is estimated to increase to about 14% in the fourth year before starting to decline. In addition, the first spell of unemployment is estimated to have the largest effect with repeat incidences causing a further scarring. Separations due to redundancy are found to be less scarring relative to other causes. The worst affected were men aged over 45 with no educational qualifications. The study could not find any significant effects of unemployment duration on subsequent wages in addition to the incidence effect.