The Duration of Unemployment and the Persistence of Wages

In this paper we examine the persistent effects of past wages of displaced workers on the probability of finding a new job and on wages in the new job. We use a new database looking at the post-displacement experience of a sample of Belgian workers who have lost their jobs because of a sizeable reduction in the work-force of their firm. We decompose past wages into a market return to human capital, a firm-specific component (the `firm effect'), and an individual component. We develop an information model of wages and test its predictions. These predictions are validated by the evidence on subsequent wages. We also find that spells of unemployment are long, but that re-employed workers suffer limited wage losses on re-employment. This suggests that some institutional constraints prevent wages from falling.