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What Are the Long-Term Effects of UI? Evidence from the UK JSA Reform

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  • Barbara Petrongolo

Abstract

This paper investigates long-term returns from unemployment compensation, exploiting variation from the UK JSA reform of 1996, which implied a major increase in job search requirements for eligibility and in the related administrative hurdle. Search theory predicts that such changes should raise the proportion of non-claimant nonemployed, with consequences on search effort and labor market attachment, and lower the reservation wage of the unemployed, with negative effects on post-unemployment wages. I test these ideas on longitudinal data from Social Security records (LLMDB). Using a difference in differences approach, I find that individuals who start an unemployment spell soon after JSA introduction, as opposed to six months earlier, are 2.5-3% more likely to move from unemployment into Incapacity Benefits spells, and 4% less likely to have positive earnings in the following year. This latter employment effect only vanishes four years after the initial unemployment shock. At the same time, earnings for the treated individuals seem to be lower than for the non treated, but the confidence intervals around these estimated effects are quite large to exclude a wider variety of scenarios. These results suggest that while tighter search requirements were successful in moving individuals off unemployment benefits, they were not successful in moving them onto new or better jobs, with fairly long lasting unintended consequences on a number of labor market outcomes.

Suggested Citation

  • Barbara Petrongolo, 2007. "What Are the Long-Term Effects of UI? Evidence from the UK JSA Reform," CEP Discussion Papers dp0841, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0841
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    References listed on IDEAS

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    Cited by:

    1. Manning, Alan, 2009. "You can't always get what you want: The impact of the UK Jobseeker's Allowance," Labour Economics, Elsevier, vol. 16(3), pages 239-250, June.

    More about this item

    Keywords

    unemployment compensation; job search; post-unemployment earnings;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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