Cash-on-hand and the duration of job search : quasi-experimental evidence from Norway

Abstract

We identify the causal effect of lump‐sum severance payments on non‐employment duration in Norway by exploiting a discontinuity in eligibility at the age of 50. We find that a payment worth 1.2 months' earnings at the median lowers the fraction re‐employed after a year by about 8 percentage points. This is what we would expect if liquidity constraints force unemployed workers to accept a job offer earlier than would be optimal. As further support for the liquidity interpretation, we use data on wealth before unemployment to show that the effect of non‐employment duration occurs for the non‐wealthy only.