Burdened with the OECD's longest spells of unemployment, 1980s Belgium is a good case study for seeking the causes of Western Europe's problem of long-duration unemployment. To support the story that the long-term unemployed in Europe stay that way because they search less or receive fewer offers, Jonathan Leonard and Marc Van Audenrode, in Discussion Paper No. 1227, test for microeconomic evidence by examining whether Belgians who are unemployed for short or long terms differ in their characteristics, in their probability of finding a new job, and in their earnings if they do succeed in finding one.

The authors examine the persistent effects of past wages on the probability of finding a new job and on wages in the new job. They use a new database, which looks 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. Past wages are decomposed into a market return to human capital, a firm-specific component and an individual component. The authors develop an information/signalling model of wages and test its predictions. These predictions are validated by the evidence on subsequent wages. They 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.

The Duration of Unemployment and the Persistence of Wages
Jonathan Leonard and Marc Van Audenrode

Discussion Paper No. 1227, August 1995 (HR)