Are labor market institutions mitigating workers’ cost of unemployment?

The paper uses panel data from the Survey of Income and Program Participation (SIPP) and the European Community Household Panel (ECHP) to conduct a comparative analysis of workers’ post-unemployment earnings trajectories in the United States and twelve Western European countries. Across our sample of industrialized countries, results of difference-in-difference propensity score matching show post-unemployment earnings losses to be largely permanent and particularly significant for high-wage and older workers as well as for women. The analyses also reveal that negative effects of unemployment on workers’ subsequent earn-ings are mitigated through either generous unemployment benefit systems or strict labor mar-ket regulation. In part, these effects stem from favorable behavioral responses that prevent downward occupational and industrial mobility, partly the effects are due to changes in the overall structure of labor markets favoring the transferability of worker skills between jobs. These positive effects materialize despite the fact that labor market policies tend to success-fully protect the core work force from experiencing a job loss in the first place.