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Extended Unemployment Benefits and Early Retirement: Program Complementarity and Program Substitution

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Author Info

  • Inderbitzin, Lukas

    ()
    (University of St. Gallen)

  • Staubli, Stefan

    ()
    (University of Calgary)

  • Zweimüller, Josef

    ()
    (University of Zurich)

Abstract

This paper explores how extended unemployment insurance (UI) benefits targeted to older workers affect early retirement and social welfare. The trade-off of optimal UI between consumption smoothing and moral hazard requires accounting for the entire early retirement system, which often includes extended UI and relaxed access to disability insurance (DI). We argue that extended UI generates program complementarity (increased take-up of UI followed by DI and/or regular retirement benefits) and program substitution (increased take-up of UI instead of DI). Exploiting Austria's regional extended benefit program, which extended regular UI benefits to up to 4 years, we find: (i) program complementarity is quantitatively important for workers aged 50+; and (ii) program substitution is quantitatively relevant for workers aged 55+. We derive a simple rule for optimal UI that accounts for program complementarity and program substitution. Using the sufficient statistics approach, we conclude that UI for older workers was too generous and the regional extended benefit program was a suboptimal policy.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7330.

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Length: 49 pages
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7330

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Related research

Keywords: optimal benefits; policy reform; disability; unemployment; early retirement;

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References

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  1. Staubli, Stefan & Zweimüller, Josef, 2011. "Does Raising the Retirement Age Increase Employment of Older Workers?," IZA Discussion Papers 5863, Institute for the Study of Labor (IZA).
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  3. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics 35596, London School of Economics and Political Science, LSE Library.
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  7. Kyyrä, Tomi & Ollikainen, Virve, 2008. "To search or not to search? The effects of UI benefit extension for the older unemployed," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2048-2070, October.
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Citations

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Cited by:
  1. Arash Nekoei & Andrea Weber, 2014. "Does Extending Unemployment Benefits Improve Job Quality?," NRN working papers 2014-04, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
  2. Maciej Lis & Agnieszka Kamińska & Aart-Jan Riekhoff & Izabela Styczynska, 2013. "The Impact of Institutional and Socio-Ecological Drivers on Activity at Older Ages," CASE Network Reports 0115, CASE-Center for Social and Economic Research.
  3. Rothstein, Jesse & Valletta, Robert G., 2014. "Scraping by: Income and program participation after the loss of extended unemployment benefits," Working Paper Series 2014-6, Federal Reserve Bank of San Francisco.
  4. Rafael Lalive & Camille Landais & Josef Zweimüller, 2013. "Market Externalities of Large Unemployment Insurance Extension Programs," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 13.15, Université de Lausanne, Faculté des HEC, DEEP.
  5. Ola Lotherington Vestad, 2012. "Labour supply effects of early retirement provision," Discussion Papers 717, Research Department of Statistics Norway.
  6. Staubli, Stefan & Zweimüller, Josef, 2013. "Does raising the early retirement age increase employment of older workers?," Journal of Public Economics, Elsevier, vol. 108(C), pages 17-32.
  7. Reiso, Katrine Holm, 2014. "The Effect of Welfare Reforms on Benefit Substitution," Discussion Paper Series in Economics 22/2014, Department of Economics, Norwegian School of Economics.

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