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How changes in Financial Incentives Affect the Duration of Unemployment

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  • Rafael Lalive
  • Jan van Ours
  • Josef Zweimüller

Abstract

This paper studies how changes in the two key parameters of unemployment insurance – the benefit replacement rate (RR) and the potential duration of benefits (PBD) – affect the duration of unemployment. In 1989, the Austrian government made unemployment insurance more generous by changing, simultaneously, the maximum duration of regular unemployment benefits and the earnings replacement ratio. We find that increasing the replacement ratio has much weaker disincentive effects than increasing the maximum duration of benefits. We use these results to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system and costs due to behavioral responses of unemployed workers. Results indicate that costs due to behavioral responses are substantial.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 206.

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Handle: RePEc:zur:iewwpx:206

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Keywords: maximum benefit duration; replacement rate; unemployment duration; unemployment insurance; policy change;

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  2. Steiner, Viktor, 1997. "Extended benefit entitlement periods and the duration of unemployment in West Germany," ZEW Discussion Papers 97-14, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  5. Fredriksson, Peter & Holmlund, Bertil, 2003. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Working Paper Series 2003:10, Uppsala University, Department of Economics.
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  17. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
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  22. John C. Ham & Samuel Rea, 1986. "Unemployment Insurance and Male Unemployment Duration in Canada," Working Papers 592, Princeton University, Department of Economics, Industrial Relations Section..
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  24. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  25. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
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