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The Labor Market Effects of Indexing Unemployment Benefits to Previous Earnings


  • Burkhard Heer

    (Free University of Bolzano-Bozen and CESifo, Munich)

  • Albrecht Morgenstern

    (University of Bonn)


In most Organization for Economic Cooperation and Development (OECD) countries, unemployment benefits are tied to previous labor earnings. The authors study the progressivity of this indexation with regard to its effects on employment, output, and wages in three non-Walrasian equilibrium models of the labor market. In the cases of decentralized union wage bargaining and search unemployment and Nash wage bargaining, employment, output, and wages increase with the degree of indexation. The indexation of unemployment benefits to previous earnings, however, has no effect in the case of efficiency wages. The results also suggest that a more progressive indexation of unemployment benefits is welfare enhancing if wages are bargained.

Suggested Citation

  • Burkhard Heer & Albrecht Morgenstern, 2005. "The Labor Market Effects of Indexing Unemployment Benefits to Previous Earnings," Public Finance Review, , vol. 33(3), pages 385-402, May.
  • Handle: RePEc:sae:pubfin:v:33:y:2005:i:3:p:385-402

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    References listed on IDEAS

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    Cited by:

    1. Beissinger, Thomas & Büsse, Oliver, 2002. "The Impact of the Unemployment Benefit System on International Spillover Effects," University of Regensburg Working Papers in Business, Economics and Management Information Systems 376, University of Regensburg, Department of Economics.
    2. Thomas Beissinger & Oliver Büsse, 2001. "Bismarck versus Beveridge: Which Unemployment Compensation System is more Prone to Labor Market Shocks?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(1), pages 1-78, December.
    3. Raurich, Xavier & Sorolla, Valeri, 2014. "Growth, unemployment and wage inertia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 42-59.
    4. Stéphanie Jamet & Thomas Chalaux & Vincent Koen, 2013. "Labour Market and Social Policies to Foster More Inclusive Growth in Sweden," OECD Economics Department Working Papers 1023, OECD Publishing.
    5. Laszlo Goerke & Markus Pannenberg & Heinrich Ursprung, 2010. "A positive theory of the earnings relationship of unemployment benefits," Public Choice, Springer, vol. 145(1), pages 137-163, October.
    6. Goerke, Laszlo & Madsen, Jakob B., 2003. "Earnings-related unemployment benefits and unemployment," Economic Systems, Elsevier, vol. 27(1), pages 41-62, March.
    7. Niklas Potrafke, 2010. "Labor market deregulation and globalization: empirical evidence from OECD countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 146(3), pages 545-571, September.
    8. Goerke, Laszlo & Madsen, Jakob B., 2003. "Earnings-Related Unemployment Benefits in a Unionised Economy," IZA Discussion Papers 701, Institute for the Study of Labor (IZA).

    More about this item


    unemployment; benefits; progressive indexation; union wage setting;

    JEL classification:

    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices


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