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Household Level Economic Incentives, Unemployment Trap and Job Finding Probability

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  • Pasi Holm
  • Tomi Kyyrä
  • Juha Rantala

Abstract

This paper considers the sensitivity of the household's disposable income with respect to the labour market states and the labour market transitions of unemployed workers. The paper analyses the following questions: (i) which are the determinants of starting wages? (ii) how many unemployed are in the unemployment trap? (iii) how do household level economic incentives affect the conditional probability of finding a job? The empirical analysis is based on individual panel data covering the years 1987–1993 in Finland, when the unemployment rate rose from about 4% to 18%. We have estimated the starting wage equation to calculate the effects of hypothetical re-employment on the household's disposable income and to evaluate the frequency of the unemployment trap. To analyse factors affecting the transition out of unemployment to employment in open labour market, we estimate unemployment duration using a semi-parametric proportional risk model. The paper shows that the impact of the economic incentives, measured by the hypothetical change in household disposable income, on employment is more important in the recession than in the boom. Copyright Kluwer Academic Publishers 1999

Suggested Citation

  • Pasi Holm & Tomi Kyyrä & Juha Rantala, 1999. "Household Level Economic Incentives, Unemployment Trap and Job Finding Probability," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 361-378, August.
    • Handle: RePEc:kap:itaxpf:v:6:y:1999:i:3:p:361-378
    DOI: 10.1023/A:1008707618520
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    References listed on IDEAS

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    Cited by:

    1. D'Addio, Anna Cristina & De Greef, Isabelle & Rosholm, Michael, 2002. "Assessing Unemployment Traps in Belgium Using Panel Data Sample Selection Models," IZA Discussion Papers 669, Institute of Labor Economics (IZA).
    2. Tomi Kyyrä & Ralf A. Wilke, 2007. "Reduction in the Long-Term Unemployment of the Elderly: A Success Story from Finland," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 154-182, March.
    3. Kyyrä, Tomi & Wilke, Ralf A., 2006. "Reduction in the Long-Term Unemployment of the Elderly: A Success Story from Finland Revised," Discussion Papers 396, VATT Institute for Economic Research.
    4. Erkki Koskela & Roope Uusitalo, 2003. "The Un-Intended Convergence: How the Finnish Unemployment Reached the European Level," CESifo Working Paper Series 878, CESifo.
    5. Jouko Verho, 2005. "Unemployment Duration and Business Cycles in Finland," Working Papers 214, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    6. Erkki Koskela & Roope Uusitalo, 2003. "The Un-Intended Convergence: How the Finnish Unemployment Reached the European Level," CESifo Working Paper Series 878, CESifo.
    7. Saarela, Jan, 2006. "Replacement rates and labour market behaviour," Socio-Economic Planning Sciences, Elsevier, vol. 40(3), pages 187-211, September.
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