The Matthew effect of unemployment: how does it affect wages in Belgium

Better understand the consequences of unemployment in terms of labour market opportunities as well as psychological well-being is of primary importance for any policies aimed at reducing unemployment. One way by which unemployment may impact on future labour market outcomes is through a reduction of subsequent earnings. This study therefore investigates the effects of the incidence and duration of unemployment on re-entry wages in Belgium using the Panel Study on Belgian Households for the period 1994-2002. The methodology used is based on a fixed effects model controlling for unobserved heterogeneity and sample selection bias. Results suggest that unemployment most often has a detrimental effect in terms of future labour market prospects. In other words, it can hardly be seen as an investment period allowing the unemployed to find a better match afterwards. The unemployment penalty may vanish if the unemployed find a stable job. However they are most often characterized by smaller average number of tenure years than individuals who did not go through such an experience. Consequently there is a risk that individuals having experienced unemployment will never be able to eliminate the wage penalty if they do not enter into stable job. Finally, we have found robust evidence that the wage penalty increases as the unemployment spell lengthens. This result is particularly alarming given the high proportion of long term unemployment in Belgium. These conclusions imply that unemployment costs go beyond the simple loss of income and human capital associated with job loss. This implies a substantial leeway for public intervention.