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

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  • Inderbitzin, Lukas

    ()

  • Staubli, Stefan

    ()

  • Zweimüller, Josef

    ()

Abstract

This paper explores how extended unemployment insurance (UI) benefits targeted to older workers affect early retirement and social welfare. We argue that the analysis of UI's tradeoff between consumption smoothing and moral hazard needs to consider the entire early retirement system, which often consists of extended UI and relaxed access to disability insurance (DI). We argue that extended UI generates program complementarity (higher future take-up of DI and/or regular retirement benefits) or program substitution (lower contemporaneous take-up of DI benefits). 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 an optimal UI formula in the spirit of Baily (1978) and Chetty (2006) that features 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://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1323.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1323.

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Length: 51 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:23

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

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References

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  1. Pascal Michaillat & Emmanuel Saez & Camille Landais, 2011. "Optimal Unemployment Insurance over the Business Cycle," 2011 Meeting Papers 124, Society for Economic Dynamics.
  2. Tomi Kyyrä & Ralf Wilke, 2004. "Reduction in the Long-Term Unemployment of the Elderly: A Success Story from Finland," Discussion Papers 346, Government Institute for Economic Research Finland (VATT).
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  9. Pavoni, Nicola & Violante, Giovanni L, 2006. "Optimal Welfare-to-Work Programs," CEPR Discussion Papers 5937, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. 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.
  2. Rafael Lalive & Camille Landais & Josef Zweimüller, 2013. "Market Externalities of Large Unemployment Insurance Extension Programs," CESifo Working Paper Series 4413, CESifo Group Munich.
  3. Ola Lotherington Vestad, 2012. "Labour supply effects of early retirement provision," Discussion Papers 717, Research Department of Statistics Norway.
  4. Rothstein, Jesse & Valletta, Robert G., 2014. "Scraping By: Income and Program Participation After the Loss of Extended Unemployment Benefits," IZA Discussion Papers 8022, Institute for the Study of Labor (IZA).
  5. 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.
  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. 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.

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