Unemployment Insurance, Wage Dynamics and Inequality Over the Life Cycle


  • We thank Astrid Gamba, Luigi Pistaferri, three anonymous referees and seminar participants at EALE 2009 Tallinn Conference, ESPE 2010 Essen Conference, RES 2012 Cambridge Conference, the IZA Workshop on ‘Unemployment Insurance and Flexicurity’, the ZEW Workshop on ‘Flexibility in Heterogeneous Labour Markets’, the Italian Treasury, Wurzburg and BeNA Berlin for useful comments. Cappellari gratefully acknowledges the hospitality of the Centre for Corporate Performance in Aarhus and the Danish National Centre for Social Research in Copenhagen. The usual disclaimers apply.

Corresponding author: Lorenzo Cappellari, Università Cattolica Milano, Largo Gemelli 1, I-20123, Milan, Italy. Email: lorenzo.cappellari@unicatt.it.


We investigate the relationship between life cycle wages and individual membership of unemployment insurance schemes in Denmark. We separate permanent from transitory wages and characterise them using membership of unemployment insurance funds. We find that unemployment insurance is associated with lower wage growth heterogeneity over the life cycle and greater wage instability, changing the nature of wage inequality from permanent to transitory. Although we are in general unable to formally test for moral hazard against adverse selection into unemployment insurance, robustness checks suggest that moral hazard is the relevant interpretation.