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Unemployment Traps: Do Financial Dis-incentives matter?

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  • Pedersen, Peder J.

    ()
    (Centre for Labour Market and Social Research, Aarhus School of Business)

  • Smith, Nina

    ()
    (Centre for Labour Market and Social Research, Aarhus School of Business)

Abstract

This paper analyses the importance of financial dis-incentives for workers in Denmark. Based on a panel survey which is merged to a number of administrative registers it is possible to calculate precise measures of the economic incentives for labour force participants between employment in a full time job and being on unemployment insurance benefits and considering also the fixed costs of work. The results indicate large dis-incentives effects for groups, especially low paid women. In 1996, 6 per cent of Danish men and 13 per cent of the women had a lower disposable net income if working a full-time job compared to being on unemployment benefits. The effect of these financial dis-incentives is analysed in simple reduced form models of on-the-job search, unemployment search behaviour, unemployment risk, and transition out of the labour force. We find that the net compensation rate in unemployment has a significant impact on women's propensity to leave the labour force, on measures of search intensity, on the risk of being hit by unemployment and on one of our flexibility measures, i.e. the maximum acceptable commuting time to a job. The net compensation rate has no impact on the willingness to move to another place to get a job. However, here we find a significant impact from job attitude related measures. We end the paper reporting the results from including attitude variables along with economic variables. We find a number of significant effects from attitude variables. However, the main conclusion is that economic incentives dominate the present analysis of unemployment traps.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research in its series CLS Working Papers with number 01-1.

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Length: 29 pages
Date of creation: 27 Jun 2002
Date of revision:
Handle: RePEc:hhs:aarcls:2001_001

Note: Published in: Peder J. Pedersen & Nina Smith. Unemployment Traps: Do Financial Dis-incentives matter?. European Sociological Review. 2002: 271-288.
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Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 48 66 88
Fax: + 45 86 15 01 88
Web page: http://www.cls.dk
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Keywords: Unemployment traps; Incentives; Job attitudes;

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References

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  1. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," Papers 1997-25, Uppsala - Working Paper Series.
  2. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  3. Eissa, Nada & Hoynes, Hilary Williamson, 1999. "The Earned Income Tax Credit and the Labor Supply of Married Couples," Department of Economics, Working Paper Series qt1024b9z8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Callan, T. & Dex, S. & Smith, N. & Vlasblom, J.D., 1999. "Taxation of Spouses: a Cross-Country Study of the Effects on Maaried Women's Labour Supply," Papers 99-02, Centre for Labour Market and Social Research, Danmark-.
  5. Graversen, E.K. & Smith, N., 1998. "Labour Supply, Overtime Work and Taxation in Denmark," Papers 98-06, Centre for Labour Market and Social Research, Danmark-.
  6. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
  7. Pissarides, C. & Wadsworth, J., 1988. "On-The-Job Search: Some Empirical Evidence," Papers 317, London School of Economics - Centre for Labour Economics.
  8. Andrew Dilnot & Alan Duncan, 1992. "Lone mothers, family credit and paid work," Fiscal Studies, Institute for Fiscal Studies, vol. 13(1), pages 1-21, February.
  9. Atkinson, A.B., 1987. "Income maintenance and social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 13, pages 779-908 Elsevier.
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Cited by:
  1. Anna Cristina d'Addio & Isabelle De Greef & Michael Rosholm, 2002. "Assessing Unemployment Traps in Belgium using Panel Data Sample Selection models," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C1-3, International Conferences on Panel Data.
  2. Nisar Ahmad & Rayhaneh Esmaeilzadeh, 2009. "Immigrant-Native Differences in Earnings Mobility Processes: Evidence from Canadian and Danish Data," Economics Working Papers 2009-13, School of Economics and Management, University of Aarhus.
  3. Nisar Ahmad & Rayhaneh Esmaeilzadeh & J?rgen Hansen, 2014. "Immigrant-Native Differences in Earnings Mobility Processes," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 13-32, Feburary.
  4. Kamil Galuscak & Jan Pavel, 2012. "Taxes and Benefits: Work Incentive Effects of Policies," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(1), pages 27-43, February.
  5. Kamil Galuscak & Jan Pavel, 2007. "Unemployment and Inactivity Traps in the Czech Republic: Incentive Effects of Policies," Working Papers 2007/9, Czech National Bank, Research Department.
  6. Tatsiramos, Konstantinos, 2004. "Geographic Labour Mobility and Unemployment Insurance in Europe," IZA Discussion Papers 1253, Institute for the Study of Labor (IZA).
  7. J. de Koning & R. Layard & S. Nickell & N. Westergaard-Nielsen, 2004. "Policies for full employment," LSE Research Online Documents on Economics 47444, London School of Economics and Political Science, LSE Library.
  8. Bjørnskov, Christian, 2004. "Inequality, Tolerance, and Growth," Working Papers 04-8, University of Aarhus, Aarhus School of Business, Department of Economics.
  9. Torben Andersen, 2010. "Why do Scandinavians Work?," CESifo Working Paper Series 3068, CESifo Group Munich.
  10. Rosholm, Michael & Roed, Marianne & Schone, Pal, 2006. "Are New Work Practices and New Technologies Biased against Immigrant Workers?," IZA Discussion Papers 2135, Institute for the Study of Labor (IZA).
  11. Rosholm, Michael & Vejlin, Rune, 2010. "Reducing income transfers to refugee immigrants: Does start-help help you start?," Labour Economics, Elsevier, vol. 17(1), pages 258-275, January.
  12. Torben M. Andersen, 2009. "Taxes and employment - is there a Scandinavia puzzle ?," European Economy - Economic Papers 359, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  13. Kohns, Stephan, 2001. "Testing for Asymmetry in British, German and US Unemployment Data," IZA Discussion Papers 341, Institute for the Study of Labor (IZA).

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