Is there an economic case for supporting voluntary unemployment?
New research has found labour market mobility benefits productivity, with voluntary unemployment playing a key role in workforce efficiency and economic outcomes
When workers voluntarily leave jobs to become unemployed, should they be treated differently from those who lose their jobs involuntarily? Current policies across many developed nations, including the United States, suggest they should. However, recent research challenges this conventional wisdom, raising important questions about labour market efficiency and economic productivity.
The hidden impact of voluntary unemployment
Voluntary unemployment represents a substantial portion of workforce transitions, accounting for approximately 15-35% of all movements from employment to unemployment, according to research conducted by Zachary Hayward, Pre-doctoral Economist at e61 Institute, together with co-authors Petr Sedláček, Professor of Economics at the UNSW Business School, and Matt Nolan, Research Manager at the e61 Institute, which has a policy research partnership with UNSW Business School.
This finding contradicts traditional economic thinking, which has historically failed to distinguish between types of unemployment. “The economic literature tends not to make a distinction about why people enter unemployment,” explained Mr Hayward during a recent presentation at a UNSW macroeconomics workshop. “But in terms of policy, we make a very sharp distinction between these people.”
This policy distinction creates real consequences. In Australia, workers who voluntarily leave employment must wait at least four weeks before receiving unemployment benefits. In the United States, the impact is even more severe, with voluntarily unemployed workers often receiving no unemployment benefits whatsoever.
“We thought the topic was interesting, because unemployment is typically thought of as a very undesirable outcome for individuals – and for good reason,” said Prof. Sedláček. “There are by now plenty of studies showing that going through unemployment comes with quite a substantial ‘earnings scar’.
“While there are several technical difficulties with estimating these scars, there is, I think, consensus that previously unemployed people find it very difficult to catch up in terms of their earnings to where they ‘would have been, had they stayed employed’. And this scar can persist for many years. So, from this point of view, it’s a bit of a mystery that we see somewhere between 15-35% of people who enter unemployment doing it voluntarily.”
Striking differences in worker outcomes
Mr Hayward’s presentation, based on a working paper titled Voluntary Unemployment, examined data from both Australian and American labour markets to determine whether these policy differences are justified by economic outcomes.
One of the most significant findings from the research was the difference in post-unemployment earnings trajectories between the voluntarily and involuntarily unemployed. “We show that voluntary separators do end up with higher wages,” Mr Hayward noted during his presentation. Individuals who enter unemployment voluntarily do not experience a persistent drop in subsequent earnings – unlike their involuntarily unemployed counterparts.
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In Australia, two years after separation, those who transitioned into unemployment voluntarily enjoyed about 10% higher earnings compared to those who became unemployed for involuntary reasons. Similar patterns emerged in the US labour market.
The research methodology involved examining data from the Household and Income Dynamics in Australia survey and the Australian Longitudinal Labour Force Survey, as well as the Survey of Income and Program Participation in the United States. These comprehensive datasets allowed the researchers to track individuals over time and examine their labour market outcomes after different types of employment separations.
A mismatch matter
Why do voluntary separators fare better in the long run? The researchers developed a structural model that offers an explanation based on worker-firm matching. Their model suggests that voluntary unemployment often occurs when productive workers find themselves employed by less productive firms. These workers choose to separate into unemployment to search for better matches with more productive employers.
“If a high-productivity worker is matched with a low-productivity firm, that match is going to separate at the end of period one,” Mr Hayward explained. “We interpret such endogenous separations as ‘voluntary’ when a productive worker is (mis)matched with a relatively unproductive firm.”
This mismatch theory explains why these workers eventually see earnings improvements. After a period of job searching, they find employment with firms that better match their productivity levels, resulting in higher wages.
“In the paper, we make one particular point: If indeed voluntary unemployed are more like people moving from one job to the next, then making these moves harder with low (no) unemployment benefits could reduce the ability of workers to find the right job,” said Prof. Sedláček.
“Moreover, it would also shrink the applicant pool for firms with vacant jobs and this can have knock-on effects whereby businesses would post fewer job vacancies. All of this can then reduce the efficiency with which the labour market allocates workers to the right jobs, lowering aggregate productivity.”
Policy implications for business and government
The findings raise significant questions about current policy approaches that penalise voluntary separations. The research suggests that excluding voluntarily unemployed workers from unemployment benefits might harm economic productivity rather than promote it.
“The overall policy conclusion is that policy suggests that we should sort of treat these people differently because they are different. And it turns out, it’s true, these types of workers are different, but we probably shouldn’t treat them differently,” Mr Hayward affirmed.
Using their structural model, the researchers conducted a thought experiment: what if Australia adopted the US approach of denying unemployment benefits to voluntarily unemployed workers? The model revealed two opposing effects. On one hand, the unemployment rate would decrease substantially as workers became less likely to voluntarily leave employment. However, this apparent benefit masks a significant cost to economic productivity.
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“High-productivity workers now tend to remain in mismatched employment relationships. This directly reduces output,” explained Mr Hayward. “Since high-productivity workers remain mismatched in existing employment relationships, there are fewer such workers to match with high-productivity employers seeking to fill new vacancies.”
This reduction in labour market mobility creates a ripple effect throughout the economy. High-productivity firms struggle to find appropriately skilled workers, leading to fewer high-quality job postings and ultimately shifting overall job quality toward lower-productivity positions.
After looking into the detailed data, Prof. Sedláček and co-authors found that the ‘voluntary unemployed’ are actually quite different from those who enter unemployment involuntarily. “Most notably, they don’t seem to experience such harsh earnings scars,” he said. “That’s what got us thinking that voluntary unemployment may be closer in spirit to people switching jobs, rather than the traditional view of unemployment. If so, this would suggest that policymakers may need to think a little differently about the involuntarily unemployed.”
Practical implications for business
For business leaders, these findings suggest that labour market mobility – even when it temporarily increases unemployment – may be beneficial for overall economic productivity. The research indicates that restrictive unemployment policies could inadvertently trap talented workers in mismatched positions, preventing them from finding roles where their skills would be better utilised.
Businesses might benefit from reconsidering their perspectives on job candidates who have periods of voluntary unemployment in their work history. Rather than viewing these gaps negatively, they might indicate a worker who actively seeks appropriate skill matches and demonstrates initiative in career management.
Additionally, the research highlights the value of creating systems that better facilitate efficient worker-firm matching. Improving recruitment processes to accurately identify worker capabilities and company needs could reduce mismatches and associated productivity losses.
Future research directions
While the current model provides valuable insights, the researchers acknowledge its limitations. “Our model is too stylised for a careful quantitative analysis of existing policy settings,” the researchers explained in their paper. They suggest that “a richer model – including on-the-job search and a more realistic modelling of worker and firm heterogeneity – would be well-suited to analyse existing and new policies.”
Future research could examine how the relationship between voluntary unemployment and economic outcomes varies across economic cycles, industries, and demographic groups. This could lead to more nuanced policy approaches that balance worker protection with economic efficiency.
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“More needs to be done to understand this phenomenon – both in the data, as well as in our model,” Prof. Sedláček added. “For instance, there are other trade-offs that policymakers may want to take into account (for example insurance vs incentives to look for jobs), but which we haven’t included in our framework. Our analysis is really just the first step, I think.”
Key takeaways for business professionals
- Voluntary unemployment represents a substantial portion of workforce transitions and may indicate workers seeking better productivity matches rather than labour market failure.
- Policies that penalise voluntary unemployment may inadvertently reduce economic productivity by trapping workers in mismatched positions.
- When evaluating job candidates, periods of voluntary unemployment might indicate initiative and career management rather than instability.
- Improving worker-firm matching mechanisms can benefit both individual businesses and the broader economy.
- Labour market mobility, even when it temporarily increases unemployment, may ultimately lead to better economic outcomes through improved worker-firm matching.
The research challenges conventional wisdom about unemployment and suggests that our current policy approaches may need reconsideration. As Mr Hayward concluded: “Since workers separate voluntarily in search of better matches, making their outside option worse reduces their incentive to do so, while eliminating them reduces unemployment, it comes at the cost of lower average productivity.”