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Identifying Unemployment Insurance Income Effects with a Quasi-Natural Experiment

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  • Mário Centeno
  • Álvaro A. Novo

Abstract

This paper acknowledges that UI has a non-distortionary income effect generated by easing the liquidity constraints of the unemployed. Using an exogenous increase in the entitlement period as a quasi-experimental setting, we find evidence of an important income effect. The extension of the entitlement period prolongs unemployment spells, but its effect is decreasing with the degree of liquidity constraints (indexed by wages quintiles). An exception to this pattern is the behavior of individuals in the first wages quintile. The fact that the most constrained individuals extend the least their unemployment spells conforms to the nonstationarity of the job search process. This result points to the possibility that the UI system may become regressive, benefiting significantly less those at the bottom of the wage distribution, who find it harder to benefit from extended UI entitlements.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200710.

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Date of creation: 2007
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Handle: RePEc:ptu:wpaper:w200710

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  1. van Ours, Jan C. & Vodopivec, Milan, 2004. "How Changes in Benefits Entitlement Affect Job-Finding: Lessons from the Slovenian "Experiment"," IZA Discussion Papers 1181, Institute for the Study of Labor (IZA).
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Cited by:
  1. Centeno, Luis & Centeno, Mário & Novo, Álvaro A., 2009. "Evaluating job-search programs for old and young individuals: Heterogeneous impact on unemployment duration," Labour Economics, Elsevier, vol. 16(1), pages 12-25, January.
  2. Mário Centeno & Álvaro Novo, 2009. "Reemployment wages and UI liquidity effect: a regression discontinuity approach," Portuguese Economic Journal, Springer, vol. 8(1), pages 45-52, April.

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