Cash-on-hand and the Duration of Job Search: Quasi-experimental Evidence from Norway

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 1.2months' 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.