Abstract:
15% of Danish workers account for 60% of unemployment. Are these workers unemployed more frequently because of their lower productivity or higher opportunity costs of employment? Using administrative data linking workers to their earnings, wealth, debt, health records, parental backgrounds, partners, job types, and firm-level value added, I find strong evidence that higher unemployment risk reflects lower productivity rather than higher pecuniary opportunity costs. A calibrated heterogeneousagents model with segmented labor markets is consistent with these findings: productivity differences and non-pecuniary opportunity costs explain most of the unemployment gap. This matters for social policy: optimal unemployment insurance is higher than if marginal workers' unemployment was predominantly due to a high pecuniary opportunity cost.