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Premium Differentiation in the Unemployment Insurance System and the Demand for Labor


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  • Rob J.M. Alessie

    (Vrije Universiteit Amsterdam)

  • Hans Bloemen

    (Vrije Universiteit Amsterdam)


We simulate the effect of the introduction of premium differentiation (experience rating) in the Dutch Unemployment Insurance system on the demand for labor for a variety of sectors in the Dutch economy. For the simulations we use the Bentolila and Bertola (1990) framework as a point of departure. In the simulations, the introduction of experience rating is modeled as expenditure neutral: in the absence of premium differentiation the cost of financing UI is modeled as a wage tax (independent of the number of workers fired by the firm), whereas in the presence of experience rating this cost is attributed to firing cost (affected by the firing action). Thus, the introduction of experience rating results in a shift from wage cost to firing cost. Following the political debate on the issue in the Netherlands, we assume that the introduction of experience rating does neither lead to a change in tax rates paid by workers nor to a change in eligibility rules or replacement rates of benefit claimants. Specific attention is paid to the distinction between ‘young’ and ‘old’ workers . In the model, labor adjustment costs (hiring and firing costs) are linear. The model allows for uncertainty in the business cycle. This discussion paper has resulted in a publication in the Journal of Population Economics , 2002, 17(4), 729-65.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 00-020/3.

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Date of creation: 22 Mar 2000
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Handle: RePEc:dgr:uvatin:20000020

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Keywords: Unemployment Insurance; premium differentiation; labor demand;

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  1. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  2. Blanchflower, David G & Oswald, Andrew J, 1994. "Estimating a Wage Curve for Britain: 1973-90," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(426), pages 1025-43, September.
  3. Topel, Robert H, 1983. "On Layoffs and Unemployment Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 73(4), pages 541-59, September.
  4. Graafland, J.J. & Huizinga, F.H., 1998. "Taxes and benefits in a non-linear wage equation," MPRA Paper 21076, University Library of Munich, Germany.
  5. Bertola, Giuseppe & Caballero, Ricardo J, 1994. "Cross-Sectional Efficiency and Labour Hoarding in a Matching Model of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 435-56, July.
  6. Holmlund, B. & Zetterberg, J., 1989. "Insider Effects In Wage Determination: Evidence From Five Countries," Papers, Uppsala - Working Paper Series 1989a, Uppsala - Working Paper Series.
  7. Burda, Michael C., 1991. "Monopolistic competition, costs of adjustment, and the behavior of European manufacturing employment," European Economic Review, Elsevier, Elsevier, vol. 35(1), pages 61-79, January.
  8. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers, Centre for Economic Performance, LSE dp0110, Centre for Economic Performance, LSE.
  9. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 1013-1047, June.
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Cited by:
  1. Ruud de Mooij, 2004. "Towards efficient unemployment insurance in the Netherlands," CPB Memorandum, CPB Netherlands Bureau for Economic Policy Analysis 100, CPB Netherlands Bureau for Economic Policy Analysis.


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