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

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Author Info

  • Lukas Inderbitzin
  • Stefan Staubli
  • Josef Zweimüller

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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File URL: http://www.econ.jku.at/papers/2013/wp1306.pdf
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Bibliographic Info

Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2013-06.

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Length: 46 pages
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:jku:econwp:2013_06

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Related research

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

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References

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  1. Stefan Staubli & Josef Zweimüller, 2011. "Does raising the retirement age increase employment of older workers?," ECON - Working Papers 020, Department of Economics - University of Zurich, revised May 2012.
  2. Karlström, Anders & Palme, Mårten & Svensson, Ingemar, 2008. "The employment effect of stricter rules for eligibility for DI: Evidence from a natural experiment in Sweden," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2071-2082, October.
  3. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
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  5. Susan Chen & Wilbert van der Klaauw, 2006. "The Work Disincentive Effects of the Disability Insurance Program in the 1990s," Working Papers 06-05, Center for Economic Studies, U.S. Census Bureau.
  6. Staubli, Stefan, 2011. "The impact of stricter criteria for disability insurance on labor force participation," Journal of Public Economics, Elsevier, vol. 95(9), pages 1223-1235.
  7. Borghans, Lex & Gielen, Anne C. & Luttmer, Erzo F.P., 2010. "Social Support Substitution and the Earnings Rebound: Evidence from a Regression Discontinuity in Disability Insurance Reform," IZA Discussion Papers 5412, Institute for the Study of Labor (IZA).
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Citations

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Cited by:
  1. 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.
  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. 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.
  4. Ola Lotherington Vestad, 2012. "Labour supply effects of early retirement provision," Discussion Papers 717, Research Department of Statistics Norway.

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