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The Design of Unemployment Transfers: Evidence from a Dynamic Structural Life-Cycle Model

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  • Peter Haan
  • Victoria Prowse

Abstract

In this paper we use a dynamic structural life-cycle model to analyze the employment, fiscal and welfare effects induced by unemployment insurance. The model features a detailed specification of the tax and transfer system, including unemployment insurance benefits which depend on an individual's employment and earnings history. The model also captures the endogenous accumulation of experience which impacts on future wages, job arrivals and job separations. For better identification of the structural parameters we exploit a quasi-natural experiment, namely reductions over time in the entitlement period for unemployment insurance benefits which varied by age and experience. The results show that a policy cut in the generosity of unemployment insurance operationalized as a reduction in the entitlement period generates a larger increase in employment and yields a bigger fiscal saving than a cut operationalized as a reduction in the replacement ratio. Welfare analysis of revenue neutral tax and transfer reforms also favors a reduction in the entitlement period.

Suggested Citation

  • Peter Haan & Victoria Prowse, 2010. "The Design of Unemployment Transfers: Evidence from a Dynamic Structural Life-Cycle Model," Discussion Papers of DIW Berlin 986, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp986
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Do not cut unemployment insurance benefits, shorten eligibility
      by Economic Logician in Economic Logic on 2010-04-01 19:09:00

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    Cited by:

    1. Gutierrez, Italo A., 2016. "Job insecurity, unemployment insurance and on-the-job search. Evidence from older American workers," Labour Economics, Elsevier, vol. 41(C), pages 228-245.
    2. Andrew Beauchamp & Geoffrey Sanzenbacher & Shannon Seitz & Meghan Skira, 2014. "Deadbeat Dads," Boston College Working Papers in Economics 859, Boston College Department of Economics.
    3. Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, vol. 178(P3), pages 582-601.
    4. Álvaro A. Novo & André C. Silva, 2017. "Can a search model predict the effects of an increase in the benefit duration? Evidence from the Portuguese unemployment insurance reform," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-14, December.
    5. Marco de Pinto, 2012. "Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis," FIW Working Paper series 092, FIW.
    6. Mike Brewer & Monica Costa Dias & Jonathan Shaw, 2012. "Lifetime inequality and redistribution," IFS Working Papers W12/23, Institute for Fiscal Studies.
    7. Marco de Pinto, 2012. "Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis," MAGKS Papers on Economics 201210, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. de Pinto, Marco, 2012. "Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 66059, Verein für Socialpolitik / German Economic Association.
    9. Marco de Pinto, 2012. "Unemployment Benefits as Redistribution Scheme for Trade Gains - A Positive Analysis," IAAEU Discussion Papers 201204, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    10. Marco de Pinto, 2012. "The Redistribution of Trade Gains and the Equity-Efficiency Trade-Off," IAAEU Discussion Papers 201206, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).

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    More about this item

    Keywords

    Unemployment insurance; Replacement ratio; Entitlement period; Life-cycle labor supply; Tax reform; Method of Simulated Moments;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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