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The Determination of Unemployment Benefits

  • Rafael Di Tella

    (Harvard Business School)

  • Robert J. MacCulloch

    (London School of Economics)

While much empirical research exists on labor market consequences of unemployment benefits, there is remarkably little evidence on the forces determining benefits. We present a simple model where workers desire insurance against unemployment risk and benefits increase the unemployment rate. We then conduct one of the first empirical analyses of the determinants of the parameters of the benefit system. Using data for developed countries for 197189, controlling for year and country fixed effects and the government's political color, we find evidence that the level of benefits falls when the unemployment rate is high. This is consistent with Wright's tax effect.

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File URL: http://dx.doi.org/10.1086/338690
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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 20 (2002)
Issue (Month): 2 (Part)
Pages: 404-434

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Handle: RePEc:ucp:jlabec:v:20:y:2002:i:2:p:404-403
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  1. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
  2. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  3. Erzo F. P. Luttmer, 2001. "Group Loyalty and the Taste for Redistribution," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 500-528, June.
  4. Wright, Randall, 1986. "The redistributive roles of unemployment insurance and the dynamics of voting," Journal of Public Economics, Elsevier, vol. 31(3), pages 377-399, December.
  5. Feldstein, Martin S, 1978. "The Effect of Unemployment Insurance on Temporary Layoff Unemployment," American Economic Review, American Economic Association, vol. 68(5), pages 834-46, December.
  6. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  7. Kiander, Jaakko, 1993. "Endogenous unemployment insurance in a monopoly union model when job search matters," Journal of Public Economics, Elsevier, vol. 52(1), pages 101-115, August.
  8. Boadway, Robin W. & Oswald, Andrew J., 1983. "Unemployment insurance and redistributive taxation," Journal of Public Economics, Elsevier, vol. 20(2), pages 193-210, March.
  9. Ram, Rati, 1987. "Wagner's Hypothesis in Time-Series and Cross-section Perspectives:," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 194-204, May.
  10. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
  11. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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