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Should Unemployment Benefits Be Related to Previous Earnings?

  • Burkhard Heer

In most OECD countries, unemployment benefits are tied to individual previous labor earnings. We study the progressivity of this indexation in a calibratedgeneral-equilibrium overlapping-generations model with flexible labor supply, keeping the government expenditures on unemployment insurance constant over the different scenarios. We find that higher indexation of unemployment benefits to previous earnings has only small quantitative effects on output, employment, the distribution of income, and welfare. We also provide a tentative analysis of the most recent Hartz IV reform, where unemployment benefits decrease sharply after one year of unemployment. This reform is found to have positive but very small efficiency and welfare effects.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 62 (2006)
Issue (Month): 4 (December)
Pages: 530-550

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200612)62:4_530:subbrt_2.0.tx_2-0
DOI: 10.1628/001522106X172689
Contact details of provider: Web page: https://www.mohr.de/fa

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  1. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  2. Jennifer Hunt, 1992. "The Effect of Unemployment Compensation on Unemployment Duration in Germany," Discussion Papers of DIW Berlin 50, DIW Berlin, German Institute for Economic Research.
  3. Gary D. Hansen & Ayse Imrohoroglu, 1990. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," UCLA Economics Working Papers 583, UCLA Department of Economics.
  4. Heer, Burkhard, 2002. "The German Unemployment Compensation System: Effects on Aggregate Savings and Wealth Distribution," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(3), pages 371-94, September.
  5. Burkhard Heer, 2002. "Should Unemployment Benefits be Related to Previous Earnings?," CESifo Working Paper Series 747, CESifo Group Munich.
  6. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
  7. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series 481, Research Institute of Industrial Economics.
  8. Burdett, Kenneth, 1979. "Unemployment Insurance Payments as a Search Subsidy: A Theoretical Analysis," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 333-43, July.
  9. Mark Huggett & Gustavo Ventura, 1997. "Understanding Why High Income Households Save More Than Low Income Households," Working Papers 9701, Centro de Investigacion Economica, ITAM.
  10. Marimon, Ramon & Zilibotti, Fabrizio, 1997. "Unemployment versus Mismatch of Talents: Reconsidering Unemployment Benefits," CEPR Discussion Papers 1769, C.E.P.R. Discussion Papers.
  11. Heer, Burkhard & Trede, Mark, 2003. "Efficiency and distribution effects of a revenue-neutral income tax reform," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 87-107, March.
  12. Heer, Burkhard, 2003. "Employment and Welfare Effects of a Two-Tier Unemployment Compensation System," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(2), pages 147-68, March.
  13. W. Henry Chiu & Edi Karni, 1998. "Endogenous Adverse Selection and Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 806-827, August.
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