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New Research finds that Unemployed men face up to a 14% "wage Penalty" on return to Employment

Originally Published 30 April 2001
New research by Dr Wiji Arulampalam of the Department of Economics at the University of Warwick shows that UK men who undergo a spell of unemployment face a "wage penalty" of about 6% on subsequent re-entry into employment, and that after three years, they will actually earn around 14% less compared to what they would have received in the absence of any period of unemployment.

Dr Arulampalam used data from the British Household Panel Survey (BHPS) conducted over the period 1991-1997. She also found that:
  • 81% of those who had experienced a spell of interruption in employment have also had a spell of unemployment prior to the last one
  • It is the first spell of interruption that has the largest scar. Subsequent spells of unemployment also carry a wage scar but not so large
  • Differences in the length of the unemployment spell produced no differences in the scarring effects seen in the form of the "wage penalty"

Dr Arulampalam also discovered that men who experience an interruption in employment because of redundancy are less scarred than men who have an interruption due to other reasons. Employment protection legislation that requires employers to give prior notice of termination, giving those facing redundancy an early start with job search. Redundancy payments, as well as the ability of recipients to claim benefits without disqualification, helps them search better for a more suitable job. Redundancy may also be less stigmatising than dismissal or sacking.

Dr Arulampalam notes and welcomes the fact that government policy attempts to address the scarring affect detailed in her research. The policy reforms which at least cushion the blow of the "wage penalty" faced by people returning to work after a period of unemployment include - the National Minimum Wage, the 10 pence starting rate of Income Tax, Working Families Tax Credit, and the reforms to the National Insurance system.

Note for Editors: This paper was produced as part of the project on Unemployment and Technical and Structural Change, which was funded by the Leverhulme Trust.

For further information contact:

Dr Wiji Arulampalam, Department of Economics
Link here to her departmental web page
University of Warwick Tel: 024 7652 3471