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How Changes in Financial Incentives Affect the Duration of Unemployment

  • Rafael Lalive
  • Jan C. van Ours
  • Josef Zweimüller

This paper studies how changes in the two key parameters of unemployment insurance – the benefit replacement rate (RR) and the potential duration of benefits (PBD) – affect the duration of unemployment. In 1989, the Austrian government made unemployment insurance more generous by changing, simultaneously, the maximum duration of regular unemployment benefits and the earnings replacement ratio. We find that increasing the replacement ratio has much weaker disincentive effects than increasing the maximum duration of benefits. We use these results to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system and costs due to behavioral responses of unemployed workers. Results indicate that costs due to behavioural responses are substantial.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1337.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1337
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  1. 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.
  2. Peter Fredriksson & Bertil Holmlund, 2006. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 357-386, 07.
  3. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
  4. Lubyova, Martina & van Ours, Jan, 1997. "Unemployment dynamics and the restructuring of the Slovak unemployment benefit system," European Economic Review, Elsevier, vol. 41(3-5), pages 925-934, April.
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  7. Moffitt, Robert & Nicholson, Walter, 1982. "The Effect of Unemployment Insurance on Unemployment: The Case of Federal Supplemental Benefits," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 1-11, February.
  8. Kenneth Carling & Bertil Holmlund & Altin Vejsiu, 2000. "Do Benefit Cuts Boost Job Findings? Swedish Evidence From the 1990s," CESifo Working Paper Series 365, CESifo Group Munich.
  9. Elena Stancanelli, 1999. "Unemployment duration and the duration of entitlement to unemployment benefits: an empirical study for Britain," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1043-1051.
  10. Adamchik, Vera, 1999. " The Effect of Unemployment Benefits on the Probability of Re-employment in Poland," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(1), pages 95-108, February.
  11. Lalive, Rafael & Zweimuller, Josef, 2004. "Benefit entitlement and unemployment duration: The role of policy endogeneity," Journal of Public Economics, Elsevier, vol. 88(12), pages 2587-2616, December.
  12. Bart, COCKX & Jean, RIES, 2004. "The Exhaustion of Unemployment Benefits in Belgium. Does it Enhance the Probability of Employment ?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  13. Addison, John T. & Portugal, Pedro, 2004. "How does the unemployment insurance system shape the time profile of jobless duration?," Economics Letters, Elsevier, vol. 85(2), pages 229-234, November.
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  15. Winter-Ebmer, Rudolf, 1998. "Potential Unemployment Benefit Duration and Spell Length: Lessons from a Quasi-Experiment in Austria," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(1), pages 33-45, February.
  16. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
  17. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July.
  18. Rafael Lalive & Josef Zweimüller, . "Benefit Entitlement and the Labor Market: Evidence from a Large-Scale Policy Change," IEW - Working Papers 105, Institute for Empirical Research in Economics - University of Zurich.
  19. Patrick A. Puhani, 2000. "Poland on the dole: The effect of reducing the unemployment benefit entitlement period during transition," Journal of Population Economics, Springer, vol. 13(1), pages 35-44.
  20. John C. Ham & Samuel Rea, 1986. "Unemployment Insurance and Male Unemployment Duration in Canada," Working Papers 592, Princeton University, Department of Economics, Industrial Relations Section..
  21. Bratberg, Espen & Vaage, Kjell, 2000. "Spell durations with long unemployment insurance periods," Labour Economics, Elsevier, vol. 7(2), pages 153-180, March.
  22. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  23. Steiner, Viktor, 1997. "Extended benefit entitlement periods and the duration of unemployment in West Germany," ZEW Discussion Papers 97-14, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  24. Green, David A & Riddell, W Craig, 1997. "Qualifying for Unemployment Insurance: An Empirical Analysis," Economic Journal, Royal Economic Society, vol. 107(440), pages 67-84, January.
  25. 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.
  26. Fitzenberger, Bernd & Wilke, Ralf A., 2004. "Unemployment Durations in West-Germany Before and After the Reform of the Unemployment Compensation System During the 1980s," ZEW Discussion Papers 04-24, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  27. Van den Berg, Gerard J., 2001. "Duration models: specification, identification and multiple durations," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 55, pages 3381-3460 Elsevier.
  28. Carling, Kenneth & Edin, Per-Anders & Harkman, Anders & Holmlund, Bertil, 1996. "Unemployment duration, unemployment benefits, and labor market programs in Sweden," Journal of Public Economics, Elsevier, vol. 59(3), pages 313-334, March.
  29. Green, David A & Riddell, W Craig, 1993. "The Economic Effects of Unemployment Insurance in Canada: An Empirical Analysis of UI Disentitlement," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages S96-147, January.
  30. van den Berg, Gerard J, 1990. "Nonstationarity in Job Search Theory," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 255-77, April.
  31. Knut Roed & Tao Zhang, 2003. "Does Unemployment Compensation Affect Unemployment Duration?," Economic Journal, Royal Economic Society, vol. 113(484), pages 190-206, January.
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