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What Are the Long-Term Effects of UI? Evidence from the UK JSA Reform

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Author Info
Barbara Petrongolo
Abstract

This paper investigates long-term returns from unemployment compensation, exploitingvariation from the UK JSA reform of 1996, which implied a major increase in job searchrequirements for eligibility and in the related administrative hurdle. Search theory predictsthat such changes should raise the proportion of non-claimant nonemployed, withconsequences on search effort and labor market attachment, and lower the reservation wageof the unemployed, with negative effects on post-unemployment wages. I test these ideas onlongitudinal data from Social Security records (LLMDB). Using a difference in differencesapproach, I find that individuals who start an unemployment spell soon after JSAintroduction, as opposed to six months earlier, are 2.5-3% more likely to move fromunemployment into Incapacity Benefits spells, and 4% less likely to have positive earnings inthe following year. This latter employment effect only vanishes four years after the initialunemployment shock. At the same time, earnings for the treated individuals seem to be lowerthan for the non treated, but the confidence intervals around these estimated effects are quitelarge to exclude a wider variety of scenarios. These results suggest that while tighter searchrequirements were successful in moving individuals off unemployment benefits, they werenot successful in moving them onto new or better jobs, with fairly long lasting unintendedconsequences on a number of labor market outcomes.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0841.

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Date of creation: Dec 2007
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Handle: RePEc:cep:cepdps:dp0841

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Related research
Keywords: unemployment compensation; job search; post-unemployment earnings;

Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

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