Dual Labour Markets and the Potential Earnings of the Unemployed

This paper shows that the potential earnings of the unemployed are lower compared to the employed. The authors interpret this as being supportive of a dual labor market with a privileged primary sector who are less likely to be unemployed compared to the secondary sector who are more likely to be unemployed. Small differences in reward to the unemployed compared to those in employment could reflect larger differences in reward to primary and secondary workers. One implication is given concerning the measurement of the replacement ratio. A large underestimate for secondary workers is possible with commonly used methods of construction.