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Unemployment Traps: Do Financial Disincentives Matter?

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Author Info

  • Pedersen, Peder J.

    ()
    (Aarhus University)

  • Smith, Nina

    ()
    (Aarhus University)

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 some 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 in 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, unemployed search behaviour, unemployment risk, and transitions 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 274.

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Length: 37 pages
Date of creation: Mar 2001
Date of revision:
Publication status: published in: European Sociological Review, 2002, 18 (3), 271-288; see IZA Reprints 173/03
Handle: RePEc:iza:izadps:dp274

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Keywords: job attitudes; Unemployment traps; incentives;

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References

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  1. N. Eissa & H. W. Hoynes, . "The Earned Income Tax Credit and the Labor Supply of Married Couples," Institute for Research on Poverty Discussion Papers, University of Wisconsin Institute for Research on Poverty 1194-99, University of Wisconsin Institute for Research on Poverty.
  2. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," CEPR Discussion Papers, Centre for Economic Policy Research, Research School of Economics, Australian National University 380, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  3. Pissarides, C. & Wadsworth, J., 1988. "On-The-Job Search: Some Empirical Evidence," Papers, London School of Economics - Centre for Labour Economics 317, London School of Economics - Centre for Labour Economics.
  4. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(5), pages 893-928, October.
  5. Christopher A. Pissarides, 1997. "The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure," CEP Discussion Papers, Centre for Economic Performance, LSE dp0361, Centre for Economic Performance, LSE.
  6. 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, Centre for Labour Market and Social Research, Danmark- 99-02, Centre for Labour Market and Social Research, Danmark-.
  7. Andrew Dilnot & Alan Duncan, 1992. "Lone mothers, family credit and paid work," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 13(1), pages 1-21, February.
  8. Atkinson, A.B., 1987. "Income maintenance and social insurance," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 13, pages 779-908 Elsevier.
  9. Graversen, E.K. & Smith, N., 1998. "Labour Supply, Overtime Work and Taxation in Denmark," Papers, Centre for Labour Market and Social Research, Danmark- 98-06, Centre for Labour Market and Social Research, Danmark-.
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Cited by:
  1. 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).
  2. 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, Charles University Prague, Faculty of Social Sciences, vol. 62(1), pages 27-43, February.
  3. J. de Koning & R. Layard & S. Nickell & N. Westergaard-Nielsen, 2004. "Policies for full employment," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 47444, London School of Economics and Political Science, LSE Library.
  4. Kohns, Stephan, 2001. "Testing for Asymmetry in British, German and US Unemployment Data," IZA Discussion Papers 341, Institute for the Study of Labor (IZA).
  5. D'Addio, Anna Cristina & De Greef, Isabelle & Rosholm, Michael, 2002. "Assessing Unemployment Traps in Belgium Using Panel Data Sample Selection Models," IZA Discussion Papers 669, Institute for the Study of Labor (IZA).
  6. 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.
  7. Bjørnskov, Christian, 2004. "Inequality, Tolerance, and Growth," Working Papers, University of Aarhus, Aarhus School of Business, Department of Economics 04-8, University of Aarhus, Aarhus School of Business, Department of Economics.
  8. Tatsiramos, Konstantinos, 2004. "Geographic Labour Mobility and Unemployment Insurance in Europe," IZA Discussion Papers 1253, Institute for the Study of Labor (IZA).
  9. Kamil Galuscak & Jan Pavel, 2007. "Unemployment and Inactivity Traps in the Czech Republic: Incentive Effects of Policies," Working Papers, Czech National Bank, Research Department 2007/9, Czech National Bank, Research Department.
  10. Torben Andersen, 2010. "Why do Scandinavians Work?," CESifo Working Paper Series 3068, CESifo Group Munich.
  11. Torben M. Andersen, 2009. "Taxes and employment - is there a Scandinavia puzzle ?," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 359, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  12. Nisar Ahmad & Rayhaneh Esmaeilzadeh, 2009. "Immigrant-Native Differences in Earnings Mobility Processes: Evidence from Canadian and Danish Data," Economics Working Papers, School of Economics and Management, University of Aarhus 2009-13, School of Economics and Management, University of Aarhus.
  13. Rosholm, Michael & Vejlin, Rune, 2010. "Reducing income transfers to refugee immigrants: Does start-help help you start?," Labour Economics, Elsevier, Elsevier, vol. 17(1), pages 258-275, January.

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